Some experienced investors are already seeing buying opportunities in the stock market that has turned bear in the U.S., signified by a decline of more than 20% from a peak.
“Billionaire Ron Baron sees recent selloff as ‘huge monstrous’ buying opportunity!” This Seeking Alpha news headline surely caught my attention.
The Canadian stock market is only down about 12% from a peak. Therefore, it’s not considered a bear market for Canadian investors yet. Energy and commodity stocks have held up well and the big Canadian bank stocks are not super bargains yet, though, CIBC (TSX:CM)(NYSE:CM) is trading at a discount of almost 20% and offers a decently attractive yield of close to 5.2%.
From the U.S. and Canadian stock markets’ technical charts, it doesn’t look like the selloff is over yet. More importantly, the Federal Reserve and the Bank of Canada are anticipating more interest rate hikes through the rest of the year as inflation is still too high.
According to Trading Economics, the inflation in the U.S. in May was 8.6% — the highest level since December 1981. Last week, the Fed hiked its benchmark interest rate by 0.75% to 1.5-1.75%. It sees the rate crossing over 3% by the end of the year. Statistics Canada recorded inflation of 6.8% in April. At the start of the month, the Bank of Canada raised the target for its overnight interest rate by 0.50% to 1.5%.
Other than cooling inflation, rising interest rates will also increase the borrowing costs for businesses and consumers. This may lead to slower growth in businesses and lower consumer spending.
Utility stocks are seen as an economic indicator as well. In a late cycle, they are bid up. Utilities were bid up. Now, they’re starting to turn. For example, I thought Fortis (TSX:FTS)(NYSE:FTS) stock was pretty fully valued when it hit CAD$61 but it managed to climb to CAD$64. In the last month though, it has quickly retreated to about CAD$58 — its 50-week simple moving average, which now acts as support.
I’ve said time and time again that despite the regulated utility’s predictability, I would only reconsider the stock when it hit a minimum yield of 4%. It’s getting close now with a yield of close to 3.7%. A 4% yield implies a price target of C$53.50, which implies a ~7.7% drop from current levels. Given today’s market, there’s a good chance it will reach that level over the next few months before it raises its dividend in late September.
Unless the central banks turn dovish, which doesn’t look like will happen any time soon, investors will probably get to buy cheaper stocks through 2022.
Investors should take the time to review their watch list and prioritize which stocks they want to buy first. Feel free to share the top dividend stocks that are on your high-conviction buy list in the comments below!
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Disclosure: As of writing, we don’t own any stocks mentioned.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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