The stock market finished last week in a weak spot, with the tech-heavy Nasdaq 100 once again leading the downward charge with rates continuing their climb. Though 3% rates on the U.S. 10-year note aren’t here yet, it seems inevitable given the momentum and the unrelenting hawkish tone exhibited by the Bank of Canada and the U.S. Fed.
Indeed, it’s been just two years since the world economy slipped into the coronavirus recession. And although employment has come a long way since those horrific days, the list of woes arguably is worse with the war in Ukraine and what could be a potential sixth wave of COVID cases. It’s not a good situation to be in.
Regardless, the Fed has its hands tied. It needs to raise rates, perhaps faster than expected, hence the recent uptick in the 10-year note yield. Now, rates could go either way from here, and a recession may not be on the table, despite the recent yield curve inversion. That’s why I’d continue to be an owner of stocks. Though the Fed has few alternatives other than tempering inflation with a couple of half-point hikes followed by a few quarter-point ones, unforeseen negative exogenous events or a worsening of the current list of crises could result in a more dovish tilt that sees inflation plaguing us for a while longer.
That’s why fighting inflation with value stocks and dividends is such a wise idea. The Fed’s schedule is aggressive, but is it set in stone? Probably not. A smart Fed would play it by ear, and that’s exactly what they’ll do, as they try their best to become transparent so as to not induce any further negative surprises and slips in the broader stock market.
Fairfax Financial Holdings
Fairfax Financial Holdings (TSX: FFH) is the insurance and holding firm run by legendary Canadian investor Prem Watsa. Watsa has a track record of making hedging bets to help his firm dodge and weave past the endless punches thrown by Mr. Market.
The company was under the spotlight during the 2008 market crash, when FFH stock held its own as everything marched lower. Undoubtedly, Watsa’s hedging bets against a financial crisis paid off big time. As of late, Fairfax has dragged its feet as the TSX proceeded higher. Hedges can work both ways, and Watsa has no crystal ball. Still, I believe in the man’s investing ability, even if his recent macroeconomic forecasting track record has been mixed.
With an improving underwriting track record and intriguing value bets, I continue to love Fairfax and Watsa, especially at today’s modest 4.6 times trailing earnings multiple. Finally, there’s a nice 1.8% yield to collect from the value play as you wait for the tides to turn and for Watsa to move on from his slump.
Bank of Montreal
Bank of Montreal (TSX: BMO)(NYSE: BMO) is a top long-term bank stock, because of its incredibly talented managers and its intriguing growth profile. With its recent acquisition of Bank of the West, BMO now has a remarkably powerful U.S. banking division.
Combined with excellent managers and a generous dividend-growth policy, I find BMO to be one of the growthiest and cheapest banks to buy and hold for the next 10 years. At around 11 times trailing earnings, BMO stock is nothing short of a bargain, as broader markets stall on the back of renewed investor jitters.
