TSX Stocks: Will the Markets Continue to Rally?

TSX stocks: Amid the broad market rally, it can still be difficult to pick outperforming stocks. That’s why investors should consider index funds.

| More on:
Watch for the Warning Signs Stock Market Prices Trends 3d Illustration

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Investors often ask me if the current market rally is justified. The distrust is certainly not out of context as we are still not out of the pandemic yet. Stocks have been making new all-time highs consistently this year, and many stocks have tripled or even quadrupled since last year’s crash. However, many economic indicators tell a different story. Besides, there are only around 5% of the global population that’s fully vaccinated.

Market rally: Can stocks sustain gains?

Well, there is a flurry of market indicators that show a disturbing bearishness. For example, the famous Warren Buffett indicator for the U.S. market is close to 200%, significantly higher than in 2007. If the ratio is close to those levels, you are playing with fire, as the Oracle of Omaha once warned.

It is a metric that shows whether the markets are overvalued or undervalued. It is calculated as the total stock market cap divided by the country’s gross domestic product. For Canada, the ratio is approximately 167%.

Are the markets overplaying the recovery card?

No, because some of the bullish indicators still seem to dominate. As markets are forward-looking and run a couple of quarters ahead, the impending economic growth appears encouraging.

Driven by prudent stimulus and infrastructure spending, people will likely spend aggressively once they are allowed to. There will be pent-up demand across segments, which might last for a prolonged period. Additionally, lower interest rates should help revive the corporate investment cycle, which will likely aid employment.

Corporate earnings growth will be a key driver for stocks in 2021 and beyond. A recent streak of corporate earnings has notably exceeded analysts’ expectations. The trend can well continue for the next few quarters on higher demand amid re-opening.

How should you play the market rally?

However, amid the broad market rally, it can still be difficult to pick outperforming stocks.  The stocks at large are rallying, but the one you have picked up is underperforming by a large margin. What can one do to avoid such a situation?

Investors can consider index funds.

Index funds are a group of stocks that give broad market representation. If you want to invest in the S&P 500 Composite Index, consider iShares Core S&P 500 Index ETF (TSX:XSP). This is like indirectly investing in top companies of the S&P 500 Index such as Apple, Amazon, Facebook, etc.

Index funds are low risk and offer diversification. Warren Buffett’s Berkshire Hathaway has also invested in the S&P 500 index funds for a long period. Even if one stock underperforms, it does not significantly affect the funds’ performance because of the low concentration. This way, investors’ stock-specific risk gets minimized.

If you want to bet on Canadian markets at large, iShares S&P/TSX 60 Index ETF (TSX:XIU) could be an attractive bet. It offers long-term capital gain with exposure to the country’s top 60 stocks.

XIU’s top three holdings include Royal Bank of CanadaShopify, and Toronto-Dominion Bank, which form around 7.8%, 6.8%, and 6.4%, respectively, in the fund.

Betting on index funds amid the ongoing market rally could be a smart move. It will generate decent returns in the long term without losing peace of mind.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Dividend Stocks

Coworkers standing near a wall
Bank Stocks

Policy Rate: 2 More Hikes After July 2022 to Reach Neutral Level

The Bank of Canada might need three more rate hikes beginning in July 2022 to reach neutral levels.

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

3 Undervalued Dividend Stocks to Buy Right Now

Dividend-paying stocks such as Bank of Montreal offers investors the opportunity to generate outsized gains in the next year.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

RRSP Dividend Investors: 2 Top Oversold TSX Stocks to Buy for Total Returns

RRSP investors can pick up top TSX dividend stocks at cheap prices today and get a shot at some attractive…

Read more »

analyze data
Dividend Stocks

2 Safe Dividend Stocks That Could Help You Fight Inflation

A dependable stream of passive income is one way to help offset rising inflation rates. Here are two top dividend…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Stay Invested in a Recession: Increase Positions in 2 Value Stocks

The suggestion of market analysts is to increase positions in two value stocks if you want to stay invested amid…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Dividend Stocks to Buy as Inflation Surges in Canada

If you're worried about how surging inflation may impact your portfolio, here are three of the best dividend stocks to…

Read more »

You Should Know This
Dividend Stocks

High Inflation: The Good and the Bad for Canadians

Consider tucking away some of your long-term savings in quality dividend stocks like Brookfield Infrastructure in this correction.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

TFSA Investors: Turn $1,000 Into $10,000 in 10 Years

10-fold growth within a decade is rare but not unheard of. You can capture this growth either by predicting a…

Read more »