It’s hard to believe that the TSX Index is closing in on all-time highs again, especially since it seemed like an AI-driven software bubble was about to burst. In any case, it feels like there can’t be an AI and software bubble going on at the same time. While the software plunge bodes well for the longevity of the AI trade, at least in my view, I also wouldn’t be surprised if the choppy January sets the stage for a volatile rest of the year.
After a historic gain for the TSX Index, which is up around 30% in the past year, some volatility is to be expected. Arguably, a correction would be a good thing for investors, especially since it’s been a while since the TSX Index was dealt one, and 2025 was one of the best years in recent memory.
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Playing defence without giving up on capital gains
Whether we’ll get a drawdown of at least 10%, though, remains the big question. As a prudent investor, you should expect one, but as a long-term thinker, you shouldn’t time it by overweighting cash, bonds, or GICs (Guaranteed Investment Certificates), or by shifting everything to an income-rich “covered call” ETF.
What does make sense, though, is going for cheap stocks with low betas that can help you prepare for the bigger bumps in the road because, like it or not, markets will roll through a couple of cracks in the asphalt whether you’ve got a pair of shocks on your TFSA portfolio or not!
So, given this, I’d argue the case for playing some defence is quite strong, especially if you’re too heavy in the high-multiple momentum plays. While there’s nothing wrong with heftier multiples, provided the fundamentals or narrative have improved, I do think that investors who were left anxious in January after a small blip might wish to readjust with the expectation of tougher sledding as we head into the Spring months.
Loblaw
Loblaw (TSX: L) is both a momentum stock (after a 48% past-year surge) and a defensive play (it’s a consumer staple that’s recession-resilient with a 0.47 beta), making it a rare growth staple for a portfolio that still wants to do better than the averages without having to feel the most pain once the next downturn hits. And, ready or not, it is going to hit at some point! With Loblaw’s loyalty program picking up speed while the firm looks to offer great deals for Canadians seeking to tighten their budgets in 2026, I see ample opportunity for the firm to make the most of tailwinds at its back.
The company is spending a great deal on opening new stores while also investing in tech to automate things going on behind the scenes. While food inflation is coming down, I simply don’t see Canadians splurging again, especially since the pain of prior inflation may have forever changed how consumers shop for groceries. Indeed, the scars of post-pandemic inflation, I think, might not be so quick to heal. And that’s a major reason Loblaw could outrun its pricier peers in the grocery scene.
Over the next five years, the big question is how much tech and AI can jolt margins. The grocery business has razor-thin margins, but automation could certainly change that. And that’s where the big opportunity, in my view, lies for Loblaw. At 25.5 times forward price to earnings, L stock is a premium staple for a Tax-Free Savings Account that’s aiming to beat the TSX.
