TD's Ryan Lewenza, Senior Analyst, U.S. Equities, and his group, have issued their latest report, which is highlighted below, and available for your review, below. Use Full Screen to enlarge, or download the report.
Rationale for a Defensive Portfolio Position
Highlights include:
· The North American equity markets are likely to experience continued challenges in the years ahead, and deliver lower returns than were experienced in the bull market of the 1980s and 1990s. The reason for this is simple: Stocks go through long-term bull and bear cycles that can last between 15 and 20 years.
· From an intermediate perspective, which we define as 6-18 months, our defensive positioning is reinforced by: 1) weak U.S. economic growth, 2) high U.S. unemployment, and 3) continued weakness in the U.S. housing market.
· Over the near-term, the technicals and news flow remain negative and reinforce our defensive view.
· While we’ve painted a rather dour picture we need to balance the negatives we currently see with the positives that do exist. In particular, stock valuations are quite attractive with the S&P 500 trading at 12x earnings, a steep discount to its long-term average of 16.5x. Stocks look attractive relative to government bonds with the 10-year U.S. Treasury yielding below 2%. Furthermore, dividend yields both in Canada and the U.S. are above their respective 10-year government bond yields. Finally, corporate earnings, for which we do expect to see negative earnings revisions, should hold up reasonably well during this weak economic patch.
· We will get through this difficult period, as we always do, but until then, continue to position portfolios defensively, by: 1) maintaining higher than normal cash balances; 2) overweighting defensive stocks relative to cyclicals; and 3) focusing on large-cap, high-quality companies that pay healthy and reliable dividend streams.
Rationale for a Defensive Portfolio Position - September 22, 2011
