For a few investors, there is a tendency to look at the top performing stock, sector or index and if they aren't participating, feel like they are missing out on an opportunity.
Such is the case with the Canadian and U.S. markets right now. The S&P 500 is coming off of a very hot 2013 but has recently slowed right down and is only up two per cent this year as of April 30.
Canada's TSX, on the other hand, is up 7.7 per cent for the same period.
Despite this shortterm difference, I don't believe investors should be rushing to move more of their investments into the Canadian markets. What investors need to understand is why the TSX is currently outperforming and whether we can expect this to continue.
The Russia-Ukraine situation that started a few months ago has caused the energy, gold and material sectors of the market to rise. As of April 30, the gold sector was up 13 per cent, materials up 10 per cent and energy up 17 per cent, since the beginning of the year. Nearly half of the TSX is made up of these three sectors and therefore, the Canadian market is enjoying a brief rally ahead of the more diversified S&P 500. Gold is seen as a "safe-haven" for investors, a place to move money into during times of chaos and fear, which we have seen before, for example during the uprisings in Africa, as well as every time North Korea threatens to detonate a bomb. Ultimately, the situation is resolved and the temporary jump in price comes back down.
Making trading decisions based on these short-lived market movements due to regional conflicts or political situations is a dangerous strategy, as we often see a reversal as soon as the situation is resolved.
The gold bubble burst in 2012 and even with this rally, I don't see it as a good investment at the moment. Unless the Chinese economy turns around (recent news isn't positive about that), it's likely that energy and mining stocks will also see some major headwinds.
I am still a firm believer that the U.S. is where your portfolio should be focused and I believe sectors like consumer discretionary, industrials, transportation and financials are the better areas to focus on.
Overall, I remain bullish on North American markets but more so for the U.S. The stronger U.S. economy should outpace our own and this provides greater opportunity for investment.
The summer period has been weaker for the past three years and any negative news could have markets pulling back, so a little caution is recommended. Investors can get hurt by trying to capitalize on these short-term events and it's important to not take on more risk than what is appropriate for you.
A more conservative investment strategy would aim for consistently good returns, and enough flexibility to actively manage risk through all market conditions.
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
