Tag Archives: U.S. stocks

The History of Shiny New Toys: Are U.S. Tech valuations stretched?

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Just as I thought it was going alright
I found out I’m wrong when I thought I was right
It’s always the same, it’s just a shame, that’s all
I could say day and you’d say night
Tell me it’s black when I know that it’s white
Always the same, it’s just a shame, and that’s all

— That’s All, by Genesis

Shutterstock/Outcome

By Noah Solomon

Special to Financial Independence Hub

As we enter 2025, the general consensus is that stocks are set to deliver another year of decent returns. Most strategists contend that we will be in a goldilocks environment characterized by positive readings on economic growth, profits, inflation, and rates.

This sentiment is particularly evident in the current valuation level of the S&P 500 Index. Regardless of which metric one uses, the index is extremely elevated relative to its historical range. Interestingly, U.S. stocks are an outlier when compared to other major markets (including Canada), which are trading at valuations that are in line with historical averages.

 

The Best of Times and the Worst of Times

Unfortunately, the history books are quite clear about what can happen to markets that attain peak valuations. The four largest debacles in the history of modern markets were all preceded by peak valuations.

  • In 1929, the U.S stock market traded at the highest PE multiple in its history up to that time. This lofty multiple presaged the worst 10 years in the history of the U.S. stock market.
  • In 1989, the Japanese stock market was trading at 65 times earnings. The aggregate value of Japanese stocks exceeded that of U.S. stocks despite the fact that the U.S. economy was three times the size of its Japanese counterpart. Soon after, things went from sensational to miserable, with Japanese stocks suffering a particularly prolonged and steep decline.
  • In early 2000, the S&P 500 Index, aided and abetted by a tremendous bubble in technology, media, and telecom stocks, reached the highest multiple in its history. Not long thereafter, the index suffered a peak trough decline of roughly 50% over the next few years.
  • In early 2008, the S&P 500 stood at its highest valuation in history, with the exception of the multiples that preceded the Great Depression and the tech wreck. The ensuing debacle brought the global economy to the brink of collapse and required an unprecedented amount of monetary stimulus and government bailouts.

The bottom line is that markets have historically been a very poor predictor of the future. At times when asset prices were most convinced of heaven, they could not have been more wrong. The loftiest valuations have not merely been followed by tough times, but by the worst of times. Time and gain, peak multiples have foreshadowed the worst results, which brings to mind one of my favorite quotes from John Kenneth Galbraith:

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

The Common Feature

There is one common feature to these sorrowful tales of peak multiples which ended in tears. In each case, peak valuations followed a prolonged period of near-perfect environments characterized by strong economic and profit growth unmarred by any obvious clouds on the horizon.

  • The years preceding the Great Depression entailed an economy that had not merely been growing but booming.
  • Prior to 1989, the Japanese economy enjoyed decades of torrid growth, prompting some economists and strategists to predict that it would eventually eclipse the U.S. economy.
  • In early 2008, the U.S. economy was being propelled by a real estate bubble underpinned by an “it can only go up” mindset and a related explosion in lax credit and lending standards.

The S&P 500 Index currently stands at its highest multiple in the postwar era, save for the late 1990s tech bubble. Optimists justify this development by pointing to what they believe to be a rosy future with respect to the U.S. economy, earnings, inflation, and interest rates. Sound familiar?

I’m not saying that highly elevated multiples necessarily foreshadow imminent doom. However, when juxtaposing the current valuation of the S&P 500 with historical experience, one should consider becoming more defensive. As famous philosopher George Santayana stated, “Those who cannot remember the past are condemned to repeat it.”

Driving without Airbags or Seatbelts

The underlying cause of the aforementioned market crashes is not merely economies and profits that were contracting, but that asset prices were priced for exactly the opposite. This left markets woefully exposed when the proverbial music stopped.

Think of market risk like you think about driving a car. If you are driving a car with airbags and you are wearing a seatbelt, then chances are you will emerge with minimal or no injuries if you get into an accident. However, if your car has no airbags and you are not wearing a seatbelt, then the chances that you will sustain serious injuries (or worse) are materially higher. Similarly, when multiples are at or below average levels and profits hit a rough patch, the resulting carnage in asset prices tends to be muted. Conversely, if any financial bumps in the road occur when valuations lie significantly higher than historical averages, then the ensuing losses will be much more severe. Also, even if you manage to complete your journey without any mishaps, it’s not clear that having no airbags and not wearing a seatbelt made your ride much more enjoyable or comfortable than if this had not been the case. Continue Reading…

Market Forecasts: Potential Impacts of Trump’s Victory on U.S. Stocks, Global Markets, and Crypto

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Image by Unsplash

By Toby Patrick

(Special to Financial Independence Hub)

Donald Trump is poised once again to become the president of the United States, becoming only the second president to be reelected after leaving the White House. The last time this happened Grover Cleveland was celebrating his second stint as president from 1893 to 1897.

Two world wars, a Great Depression, and 23 presidents later, it’s safe to say the world looks very different.

Cleveland’s second stint in office began with a decline in the New York stock market in what was known as the ‘Panic of 1893’. Fast forward over 130 years and the U.S. election is still closely linked to the performance of the U.S. stock market. Only this time we’re talking tariffs, tech companies, and cryptocurrencies. 

This article will explore what a Trump victory could mean for markets around the world.

What does Trump’s Victory mean for the U.S. Stock Market?

The general consensus is that Donald Trump’s victory will be good for businesses and the U.S. stock market. If the immediate reaction on the 6th of November is anything to go by, this would be true. Many U.S. shares hit record highs and the S&P surged by around 2.5% as investors bet on Trump’s pro-business policies.

At the heart of this initial boom were companies that stand to benefit from Trump’s hard-hitting tariffs that are to be imposed on international imports. Take the Elon Musk-owned Tesla for example. The world’s richest man acted as the President’s mouthpiece in the run-up to the election, and it’s easy to see why.

Not only do Trump’s policies favor high-net-worth individuals, but his threatened 60% tax on Chinese imports would essentially burden the competition to American-owned businesses. Tesla’s share price subsequently rose to a yearly high as news of Trump’s win filtered in.

On the flip side, Trump’s tariffs might not be good news for all American stocks. Large tech corporations rely heavily on Chinese imports. Increased costs could impact the share price of the “Magnificent Seven” stocks while also seeing the consumer pick up the cost through higher prices for electronic goods.     

What does the Trump Victory mean for the Global Stock Market?

Generally speaking, if a Trump victory is good for the U..S economy, it’s good for major global corporations that export to the U.S. Initial optimism across the rest of the world mirrored that in the U.S. However, unlike the U.S., the euphoria was dying out by Wednesday as investors realized the implications of the tariffs mentioned above and what they could mean for international trade.

While China has been threatened with the strictest of Trump’s tariffs, a 10% tax on all U.S. imports would impact Europe too. Take the U.K. for example. Rolls-Royce is one of the world’s biggest manufacturers of aircraft engines and heavily exports to the U.S. While companies like this may benefit from an upswing in the American economy, this could be wiped out by increasing taxes. 

This view would line up with performance too. Rolls-Royce Holdings initially rose as the news of a Trump victory filtered in before sharply declining to pre-election prices as investors possibly started to consider the future of international trade.

What does the Trump Victory mean for Cryptocurrencies?

Today, it’s becoming increasingly common for investors to look beyond traditional stock markets when it comes to investing. One of the most common alternatives, and a big talking point throughout the election campaign, is Bitcoin and other cryptocurrencies. Trump was seen as the pro-crypto option, publicly stating his positive view on crypto and even previously being involved in the promotion of NFTs. Continue Reading…

Four Strategic ways to invest in U.S. Stocks using BMO ETFs

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Image courtesy BMO ETFs/Getty Images

By Erin Allen, Vice President, Direct Distribution, BMO ETFs

(Sponsor Blog)

As of May 31, 2024, the U.S. stock market accounts for approximately 70% of the MSCI World Index1, making it a significant component of global equity markets: and likely a substantial portion of your investment portfolio as well.

While Canadian investors often favour domestic stocks for tax efficiency and lower currency risk2, incorporating U.S. stocks can enhance exposure to sectors where the Canadian market — predominated by financials and energy — falls short, particularly in technology and healthcare.

For Canadian investors looking to tap into the U.S. market affordably and without the hassle of currency conversion, there are numerous ETF options available. Here are four strategic ways to build a U.S. stock portfolio using BMO ETFs, catering to different investment objectives.

Low-cost broad exposure

If your objective is to gain exposure to a broad swath of U.S. stocks that reflect the overall market composition, the S&P 500 index is your quintessential tool.

This longstanding and highly popular benchmark comprise 500 large-cap U.S. companies, selected through a rigorous, rules-based methodology combined with a committee process, and is weighted by market capitalization (share price x shares outstanding).

The S&P 500 is notoriously difficult to outperform: recent updates from the S&P Indices Versus Active (SPIVA) report highlight that approximately 88% of all large-cap U.S. funds have underperformed this index over the past 15 years.3

This statistic underscores the efficiency and effectiveness of investing in an index that captures a comprehensive snapshot of the U.S. economy.

For those interested in tracking this index, BMO offers two very accessible and affordable options: the BMO S&P 500 Index ETF (ZSP) and the BMO S&P 500 Hedged to CAD Index ETF (ZUE), both with a low management expense ratio (MER) of just 0.09% and high liquidity.

While both ETFs aim to replicate the performance of the S&P 500 by purchasing and holding the index’s constituent stocks, they differ in their approach to currency fluctuations.

ZSP, the unhedged version, is subject to the effects of fluctuations between the U.S. dollar and the Canadian dollar. This means that if the U.S. dollar strengthens against the Canadian dollar, it could enhance the ETF’s returns, but if the Canadian dollar appreciates, it could diminish them.

On the other hand, ZUE is designed for investors who prefer not to have exposure to currency movements. It employs currency hedging to neutralize the impact of USD/CAD fluctuations, ensuring that the returns are purely reflective of the index’s performance, independent of currency volatility.

Large-cap growth exposure

What if you’re seeking exposure to some of the most influential and dynamic tech companies in the U.S. stock market, often referred to as the “Magnificent Seven?”

For investors looking to capture the growth of these powerhouse companies in a single ticker, ETFs tracking the NASDAQ-100 Index offer a prime solution. As of June 27, all of these companies are prominent members of the index’s top holdings4.

The NASDAQ-100 Index is a benchmark comprising the largest 100 non-financial companies listed on the NASDAQ stock exchange. This index is heavily skewed towards the technology, consumer discretionary, and communication sectors, from which the “Magnificent Seven” hail.

BMO offers two ETFs that track this index: the BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ) and the BMO Nasdaq 100 Equity Index ETF (ZNQ). Both funds charge a management expense ratio (MER) of 0.39%. Again, the key difference between them lies in their approach to currency fluctuations.

Low-volatility defensive exposure

You might commonly hear that “higher risk equals higher returns,” but an interesting phenomenon known as the “low volatility anomaly” challenges this traditional finance theory.

Research shows that over time, stocks with lower volatility have often produced returns comparable to, or better than, their higher-volatility counterparts, contradicting the expected risk-return trade-off. Continue Reading…

Checking in on our U.S. stocks

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Eight years ago, I bought 15 U.S. dividend growth stocks as a real-life portfolio demonstration. More than a demonstration, it was the total value of our U.S. holdings in our retirement accounts. The strategy was to create a more defensive and retirement-ready portfolio. The portfolio slants to quality, profitability and business moats. The 15 stocks were added to three companies that were already held – we’ll call those stock picks. The portfolio mix beat the S&P 500 by 3.2% annual while delivering better risk-adjusted returns.

Here’s the link to my recent Seeking Alpha article – the dividend growth portfolio 8 years later. You might be able to get one of three free reads for that post on Seeking Alpha. But just in case you can’t I will share a few of the key details.

And keep in mind the post and stocks that I mention is not advice. Do your own research, and know why you do what you do.

The U.S. dividend growth, plus picks portfolio

I sold my VIG, and purchased 15 individual holdings from the top 20-25 of the index. The 15 companies that I added are 3M (MMM), Pepsi (PEP), CVS Health Corporation (CVS), Walmart (WMT), Johnson & Johnson (JNJ), Qualcomm (QCOM), United Technologies (UTX), Lowe’s (LOW), Walgreens Boots Alliance (WBA), Medtronic (MDT), Nike (NKE), Abbott Labs (ABT), Colgate-Palmolive (CL), Texas Instruments (TXN) and Microsoft (MSFT).

I also have 3 U.S. stock picks by way of Apple (AAPL), Berkshire Hathaway (BRK.B), and BlackRock (BLK). For the record, these stocks are held in my wife’s accounts and my own accounts.

United Technologies merged with Raytheon (RTX) and then spun off Carrier Global Corporation (CARR) and Otis Worldwide (OTIS). We continue to hold all three and they have been wonderful additions to the portfolio. In fact, from the time of the spin-off, the 3 stocks have greatly outperformed the market (IVV) and the dividend achievers. Given that the United Technology stocks are not available for evaluation from 2015, I have run the performance update with the remaining 14 dividend achievers. Continue Reading…

A Retirement-ready portfolio of Canadian and U.S. stocks

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

In this post I’ll offer up charts on our U.S. stock portfolio and the Canadian stock portfolio. And I’ll put them together so that we can see how they work together. The total portfolio was designed to be retirement-ready. The fact that it beats the market benchmarks is a welcome surprise. At the core of the portfolio is wonderful Canadian dividend payers – the U.S. stocks fill in some portfolio holes. Let’s have a look at our U.S. and Canadian stock portfolio.

I recently received requests to share our U.S. stock portfolio holdings. While I often track that portfolio on Seeking Alpha (the land of stock pickers) that’s not a regular event on this blog. I have certainly shared the Canadian Wide Moat Portfolio on Cut The Crap Investing.

On Seeking Alpha, here is our U.S. stock portfolio. The post may be paywalled for those who have exceeded the 3 free reads on Seeking Alpha. Again, that’s why I will share some details here. But keep in mind, this is not advice. But you may be on the receiving end of some ‘good’ lessons on building the simple stock portfolio.

Skimming the dividend achievers index

In early 2015 I skimmed 15 of the largest-cap dividend achievers. What does skim mean? After extensive research into the portfolio “idea” I simply bought 15 of the largest cap dividend achievers. For more info on the index, have a look at the U.S. Dividend Apprecation Index ETF (VGG.TO) from Vanguard Canada. At the core is a meaningful dividend growth history working in concert with financial health screens. It leads to a high quality skew.

You will find that index ETF in the ETF portfolio for retirees post.

At Questrade you can buy ETFs for free.

I won’t get too deep into the methodology and how and why I constructed our portfolio in this post. I will offer more details in a post next week. Today, I will just get to the fun stuff – the holdings and the return charts and tables.

The U.S. Dividend Achievers

The 15 companies that I purchased in early 2015 are 3M (MMM), PepsiCo (PEP), CVS Health Corporation (CVS), Walmart (WMT), Johnson & Johnson (JNJ), Qualcomm (QCOM), United Technologies, Lowe’s (LOW), Walgreens Boots Alliance (WBA), Medtronic (MDT), Nike (NKE), Abbott Labs (ABT), Colgate-Palmolive (CL), Texas Instruments (TXN) and Microsoft (MSFT). Continue Reading…