How to invest when markets get spooked

Hey there, Trade Off players!

We’re in the final days of The Globe and Mail’s Trade Off stock-picking competition, which wraps up this Friday. If you’re planning any final moves, now’s the time to lock them in. We’ll keep you posted on who emerges victorious once the results are in.

In keeping with Halloween season, this week we’ll address some spooky headlines about the stock market. We’ll also explore what makes a stock a quality investment. And is it possible you’re more invested in the market than you realize? We’ll dive into that too.

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The Leaderboard

Let’s start with an update on who’s currently in the lead of our stock-picking contest:

Should you ignore scary headlines?

Some of the recent headlines about the stock market have been worrisome. There are growing fears around the AI boom and the health of the financing fuelling it. But reacting to headlines alone might be harmful to your portfolio, especially if you’re building for the long term.

Let’s start with the AI bubble talk. A growing list of successful investors, including Ray Dalio, have been sounding the alarm. But Howard Marks, co-founder and co-chair of Oaktree Capital Management, has countered by saying a real bubble requires investors to be oblivious to the risks.

Meanwhile, there’s been an incredible amount of profit generated in sectors investors appear to be nervous about. In this earnings season, I analyzed the expected full-year earnings growth for the so-called Magnificent Seven stocks. Amazingly, three of them - Nvidia, Alphabet and Amazon – are all projected to generate EPS growth of more than 100 per cent this year, according to the average analyst estimate on Wall Street.

None of this means we won’t see choppy trading ahead. But the stock market has hit all-time highs this year (more than two dozen for the S&P 500, in particular). And in the past 20 years, the S&P was positive 76 per cent of the time one year after reaching all-time levels, according to Bloomberg.

Do Fed rate hikes hurt stocks?

Another market concern has been higher bond yields, which are up in part because the U.S. Federal Reserve recently raised interest rates for the first time in three years.

Bloomberg looked at nine past examples where the Fed started raising rates. The average increase for the S&P 500 in the year that followed? A gain of 8.7 per cent. Meanwhile, in six of those examples, the S&P 500 was already within 5 per cent of a record high, which is similar to the current environment. In those cases, it ended up gaining an average of 11.6 per cent after a year. Comfort food for nervous investors?

Let’s assume some of those historical stats still don’t sit well with you. You would not be alone in wanting to get more defensive. Goldman Sachs, in response to client inquiries, put together a list of nearly two dozen stocks that offer more defensive characteristics. The list includes quite a few consumer-related companies that should manage to keep selling food and snacks whether the economy stays strong or not. Three examples of stocks on Goldman’s defensive list: J.M. Smucker, Mondelez and Hershey.

What is a ‘quality’ stock?

That Goldman list also got me thinking about what makes a stock a quality investment. I had a good conversation with Keith Buchanan of Globalt Investments about that on the latest episode of Ticker Take. Buchanan says dividends are a great way to gauge whether a company represents a quality investment opportunity. He sees a company’s capacity to pay dividends as a “receipt” that the business model is working. And he highlighted a number of stocks he thinks offer quality, including an airline, a garbage company and a toy maker.

Trade Secret Tips

Given all the record highs we’ve seen in the market, do you know how much portfolio exposure you have to stocks? Here’s a deeper exploration of that theme.

Meanwhile, if you’ve managed to build a $3-million nest egg, congratulations! So what does that actually mean for your retirement spending? Find out here.

We talk about how fees matter when it comes to your long-term performance. That subject is starting to get attention in the prediction markets space, too.

Finally, with Halloween coming, how could we not include Norman Rothery’s piece on how to unleash monster dividends in your portfolio.

Happy trading. And happy Halloween!

Jon

Jon Erlichman is the founder of Ticker Take on YouTube and a contributor to BNN Bloomberg.