The peak six months of market activity has arrived, and seasonal investing analyst and portfolio manager Brooke Thackray picks the two sectors—and names two specific ETFs—that he’s targeting to rotate funds into.
If you are searching for a rewarding relationship (to yourself, if not necessarily to each other), go no further than the ‘odd couple’ of consumer staples and technology stocks in October. So says Brooke Thackray, a Toronto seasonality-based financial analyst and author of an annual eponymous book series, Thackray’s Investor’s Guide, coming out in late November.
Despite the myriad differences between the two sectors, including their reasons for drawing market interest, both are historically strong in October, making them a perfect match for a seasonal investor’s portfolio, he explains.
Mr. Thackray serves as lead analyst of the Horizons Seasonal Rotation ETF (TSX—HAC), the second-oldest actively managed fund at Horizons ETFs.
As the peak six months of market activity approaches, the analyst is preparing to rotate HAC’s holdings. (The market’s top-performing period typically begins around Oct. 28 and lasts until May 5, based on historical data.)
“Right now, we have a lot of cash on hand that we’re starting to put to work but we’re expecting to be substantially more invested by the end of October,” says Mr. Thackray.
Commenting on consumer staples, the analyst notes that the sector in the United States had underperformed the S&P 500 through the first half of 2018. However, in June, the sector began to turn around. Since July, it has slightly outperformed the S&P 500.
In anticipation of volatility from summer into October, “investors themselves are looking for companies that are more defensive. For us, this is a good setup. It’s a good sector to be in at this time when the market is trying to figure out what to do,” says the analyst.
Market leader just reaching its peak period
As for Mr. Thackray’s case for the technology sector, he points out: “It’s been a market leader for a while . . . and here we are coming up to its really strong seasonal period.”
Technology stocks tend to do best from Oct. 10 or so through the end of November. Many businesses examine IT-related purchases at the end of the year, to say nothing of consumer interest leading up to Christmas. “The idea is to be out on technology when there’s a lot of excitement.”
Mr. Thackray advises investors to avoid energy stocks in the fall since they generally perform poorly at this time, particularly oil stocks. In fact, because of the energy sector’s prominence in the Canadian stock markets, the analyst recommends avoiding Canadian investment altogether over the autumn months.
“Nobody’s picking on Canada,” he says, but he gives little weight to speculation that oil prices could reach US$100 a barrel, and buoy up the local economy, because of sanctions on Iran.
The conclusion of North American Free Trade Agreement negotiations and the emergence of its successor, the United States-Mexico-Canada Agreement, on Oct. 1 are unlikely to spur domestic capital markets or the economy, Mr. Thackray adds.
“So far the stock market hasn’t reacted with enthusiasm. I don’t expect any change at all actually.” He says the new agreement’s terms are less favourable for Canada than the previous one. “The deal doesn’t help the stock market other than providing some clarity on capital spending.” Lower uncertainty may result in the Bank of Canada raising interest rates, which would further dampen stock market growth, the analyst argues.
2 best ETFs to buy right now
Mr. Thackray says: “The funds I work with, we generally buy sectors of the market, so we buy ETFs.” Accordingly, he names the SPDR Consumer Staples Select Sector Fund (NYSEARCA—XLP) and the SPDR Technology Select Sector Fund (NYSEARCA—XLK) as his ‘best buy’ picks for US exposure.
“With XLP, you’re looking at getting some broad holdings” including consumer goods stocks like Philip Morris International Inc., Coca-Cola Co., Walmart Inc., Costco Wholesale Corp., Colgate-Palmolive Co., and Procter & Gamble Co., says the analyst. He highlights the sector’s tendency to pay higher dividends and have more predictable growth than others.
The XLP ETF offers a dividend yield of 2.74 per cent.
However, Mr. Thackray stresses: “The technology trade would be longer, but in this case, it would only be for the month of October.” The technology SPDR’s assets are also made up of major firms like Microsoft Corp., Apple Inc., Intel Corp., and Cisco Systems Inc.
Mr. Thackray says: “We’ve seen rapid outperformance over the last couple of years. Technology stocks have outperformed outside of their seasonal period as we’ve had a structural change to the marketplace.”
Since June, the sector has settled down somewhat and performed in line with the broader market. “It’s an expensive sector, but it’s the leading sector of the market,” says the analyst. XLK offers a 1.27 per cent dividend yield.
This is an edited version of an article that was originally published for subscribers in the October 19, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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