The U.S. Fed meeting has made investor sentiments bearish. And the concerns around the U.S. shutdowns due to political disagreements only reduce confidence. The Canadian economy is showing signs of further weakness. Those who took mortgages in 2020 below 4% will see their mortgages renew at 7%. The higher rates are already causing financial troubles for many Canadian households.
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2024 is looking like a bearish market
A survey by the Financial Consumer Agency of Canada found that two out of three mortgage holders have difficulty meeting their financial commitments. In December 2022, 39.5% of mortgage holders borrowed for daily expenses.
The stock market could see a sharp correction in 2024, as households reduce savings to keep up with mortgage payments or, in the worst case, default.
Historical data has shown that such high interest rates are detrimental to the economy. Even if the Bank of Canada reduces interest rates in 2024, it will take time to seep in and could likely lead to a recession.
As mortgages and loans are sensitive to interest rates, investing in bank stocks might not be a good idea as interest and credit risk increases.
How to manage your TFSA in a bearish market
In this uncertainty, it is time to rebalance your Tax-Free Savings Account (TFSA) portfolio for the next phase of the bear market. It is better to invest in contrarian stocks that are considered safe havens or the ones with the potential to bounce back.
Barrick Gold stock
One commodity that continues to remain a hedge against inflation is gold. Barrick Gold (TSX:ABX) is one of the biggest gold miners and pays marginal dividends. If a recession materializes, the stock market will plunge along with Barrick Gold stock. But the stock will rally later as gold is considered a safe-haven asset class where investors put their money in troubled times.
The best time to invest in Barrick Gold is when it trades at normal levels and sells when the stock jumps 50-60% on market shocks. The stock is at its 2023 low. Now is a ripe time to buy it below $20 before it recovers. Invest only a small portion of your portfolio in Barrick Gold, as the stock doesn’t appreciate much in a growing economy. It only outperforms in a weak economy.
The deeper the recession, the higher will be the rally. Hence, keep an eye on the status of the economy before selling gold stocks. You might be holding on to triple-digit returns.
These gains from gold stocks can offset losses from other shares. But this hedge will only make sense when you sell the stock at a higher price. You can buy 100 shares of Barrick Gold and sell them in three stages at $30, $34, and $38.
Canadian Utilities in the bearish momentum
Another attractive stock to buy at this moment is Canadian Utilities (TSX:CU). This stock is trading at its all-time low, as the summer season kept the electricity and gas demand low. But as the winter nears, the company could see a seasonal uptick in demand, sending the stock to its seasonal peak in January end or early February. A price of $38-$40 could likely be achieved during the seasonal peak, irrespective of a recession.
Canadian Utilities has 85% of its revenue coming from regulated markets. Unless the government makes significant cuts in gas and electricity prices, the stock has the potential to reach its seasonal peak at the prescribed timeline.
You would get capital appreciation in the short term. And if you don’t want to make quick returns, you could stay invested in the stock and lock in a 6.1% dividend yield. The company also has a record of growing dividends annually for the past 51 years.
TFSA rebalancing
If you own any small- or mid-cap commercial property real estate investment trust or lending and banking stocks, you could consider selling them. Instead, consider buying pipeline and telecom stocks, as they have the potential to grow in the future.
