In talking with a portfolio manager and in looking at the data, it appears that the market is taking a breather after rallying too far, too fast. The quick, deep correction in January was painful, and it was hard to see what fundamental information caused the pessimism. The outlook wasn’t good, but it hadn’t been for months. When the correction had run its course, the market rallied, again without the support of fundamental data. Both market movements seemed due to investor sentiment.

With many companies having completed Q4 reporting, the news wasn’t great. It wasn’t worse than expected, but it was positive enough to justify a rally of almost 10% over a month and a half. All this to say that the outlook is uncertain and stocks, while they looked attractive a couple weeks ago, could fluctuate quite a bit over the coming weeks.

Interest Rates

yieldcurve

The 30-day T-bill rate is 0.44%, the short government bond yield is 0.53% and the long government bond yield is 1.86%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Credit Environment

Corporate bonds (riskier) are performing better than government bonds (safer):
guage

Long-term bonds are performing better than short-term bonds:guage-1

High quality (safer) bonds are preferable to high yield bonds (riskier):guage-2

Currency

The Brazilian Real (BZF), Swedish Krona (FXS), Australian Dollar (FXA), Japan Yen (FXY), Euro (FXE), Swiss Franc (FXF), Singapore Dollar (FXSG), Canadian Dollar (FXC), and Chinese Yuan (FXCH) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

In both cases, bonds and stocks have approximately equal momentum.
US bonds vs. US stocks:
guage-3
Canadian bonds vs. Canadian stocks:
guage-4

Global Markets

Comparing national stock markets, Peru (EPU), Brazil (EWZ), Turkey (TUR), New Zealand (ENZL), Poland (EPOL), Chile (ECH), Russia (ERUS), Philippines (EPHE), Indonesia (EIDO), South Africa (EZA), Austria (EWO), Mexico (EWW), Malaysia (EWM), Canada (EWC), Ireland (EIRL), South Korea (EWY), Thailand (THD), Denmark (EDEN), Belgium (EWK), USA S&P 500 (IVV), Netherlands (EWN), Qatar (QAT), Singapore (EWS), Taiwan (EWT), Sweden (EWD), UAE (UAE), Germany (EWG), and Israel (EIS) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,072.78. This is 1.75% higher than last week’s price (2,037.05), and 3.98% higher than last month’s price (1,993.40), and 1.41% higher than the price three months ago (2,043.94), and 7.96% higher than the price six months ago (1,920.03), and -0.35% lower than the price one year ago (2,080.15).The average P/E ratio of the S&P 100 (equal weighted) is 21.29. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.70% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Accenture Plc (ACN)
  • Exelon Corporation (EXC)
  • Fedex Corporation (FDX)
  • Facebook, Inc. (FB)
  • Mcdonald’s (MCD)
  • Philip Morris International (PM)
  • Emerson Electric Company (EMR)
  • Verizon Communications Inc. (VZ)
  • International Business Machines (IBM)
  • Oracle Corporation (ORCL)
  • Southern Company (the) (SO)
  • Microsoft Corporation (MSFT)
  • Coca-cola Company (the) (KO)
  • Unitedhealth Group Incorporated (UNH)
  • AT&T Inc. (T)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company (GM)
  • Ford Motor Company (F)
  • Metlife, Inc. (MET)

Canadian Stocks

Yesterday’s closing price was 13,440.40. This is 0.37% higher than last week’s price (13,390.20), and 2.41% higher than last month’s price (13,123.70), and 3.97% higher than the price three months ago (12,927.20), and 1.00% higher than the price six months ago (13,307.00), and -11.42% lower than the price one year ago (15,173.90).The average P/E ratio of the TSX60 (equal weighted) is 24.74. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.04% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)
  • National Bank Of Canada (NA.to)
  • Potash Corp Of Sask Inc (POT.to)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

TSX Capped REIT (XRE.to), S&P 500 (SPY), TSX Capped Composite (ZCN.to), Natural Gas (HUN.to), Canadian Universe Bond (XBB.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
The oil price is falling, which benefits manufacturers, but hurts the Canadian economy.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XUS in US$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • 2 units (40%) bonds
Market Outlook, April 4, 2016

Leave a Reply

Your email address will not be published. Required fields are marked *