Donald Rumsfeld said it best

“. . . as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know.”

Whatever unknowns loom over the market today, Robert (Hap) Sneddon of CastleMoore Inc. says the ill omens exist alongside promising signs such as ongoing commodity demand.

“It’s a bit of a bifurcated market. You know, dark for some parts, but others are looking OK,” he tells Investor’s Digest in a telephone interview. “Earnings have not fallen off a cliff.”

Mr. Sneddon is president, founder and chief portfolio manager of CastleMoore Inc. in the Greater Toronto Area. He is also a fellow of the Canadian Securities Institute, previously served as president of the Canadian Society of Technical Analysts, and is a chartered investment manager.

The portfolio manager and his CastleMoore colleagues use proprietary momentum tables that compare the performances of all types of major investment asset classes (which are then broken down further by geography, type of business, and so on) over a range of time frames from short to long to define lasting trends and decide how to allocate capital.

Maybe we won’t, but maybe we will . . .

Asked to sum up the current market mood, Mr. Sneddon says: “It’s sort of been about, ‘We’re going to have a problem soon, we think,’” adding that today’s situation is similar to last October, following a bumpy September.

Mr. Sneddon observes defensive tendencies taking hold of investors and interprets it as increasing concern about a “recession around the corner”.

“People are kind of getting their oars in the water for predictable income,” he says, leading to heavy trading among consumer staples stocks and utilities stocks, for example.

Despite climbing interest and utilities’ recent role as a bond proxy (in a record-low interest rate environment), “Right now it’s sort of disconnected,” the portfolio manager says, which he attributes to the market looking past current events to a post-inflation future. Since hitting a resistance level around December, he notes: “They’ve shot off like a rocket since the war.”

Capital tends to flock to the US markets in response to uncertainty given their reputation for safety and liquidity, the portfolio manager adds.

Meanwhile, however, typically cyclical portions of the economy such as commodities and energy have remained strong (when buoyed by solid earnings results), which in turn has favoured the resource-heavy Toronto Stock Exchange.

Mr. Sneddon says of CastleMoore’s momentum tables: “They are indicating that things will get softer, and that inflation eventually won’t be a problem.”

Relatively poor future earnings prospects (and ongoing supply issues) have bitten technology stocks hard, much as financial stocks have suffered due to the spectre of higher interest. Rising mortgage rates have also prompted slowing real estate demand.

Nevertheless, the portfolio manager asserts: “At some point, if we get clarity on this war and inflation can sort of start to come in a little bit, that darkness in finance and technology would go away.”

At the moment, robust pent-up demand has kept prices for commodities like base metals high. Mr. Sneddon argues that prices will become more normal after that demand is satisfied and the risk of rising interest subsides.

Consider producers, not commodities

Within energy, he says: “Natural gas, we like a fair bit.”

The portfolio manager concedes, “You sort of need an iron gut,” but adds, “That’s for the commodity itself. The producers are much more stable. Just like with oil, you’ve got to figure out the mix.

“For us, we always want to look at the producers to determine the direction of the commodity,” he explains, rather than the other way around, since corporate decisions are made by insiders who will have better knowledge of a company’s sustainability under different conditions than an outside market observer.

“You still want growth, but when you can get both (growth and income through dividends), that’s fantastic,” says Mr. Sneddon, highlighting AltaGas Ltd. (TSX—ALA) as a “best buy” that fits the bill. Naming his second “best buy” selection, he says: “In the US, we like Devon Energy Inc. (NYSE—DVN) . . . which has done quite well.”

The portfolio manager also sees good deals within health care, particularly in biotech, which he expects the market to avoid in 2022, but eventually return to on the back of appealing valuations.

“XLV is a longstanding solid position that we have . . . we’ve never sold it,” he says of his third “best buy” selection, the SPDR Health Care Select Sector Fund (NYSEARCA—XLV).

This is an edited version of an article that was originally published for subscribers in the April 22, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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