The oil price has dropped, which hurts the outlook for the Canadian market. Stocks still look slightly more attractive than bonds, both in Canada and the US. Strangely, Canadian small caps have outpaced large caps for the past couple weeks, and appear positioned to continue. It’s a good time to find bargains (if your expectations for the future aren’t too grim) and relative safety. Cheap REITs may the the best bet for the moment.

Interest Rates

yieldcurve

The 30-day T-bill rate is 0.49%, the short government bond yield is 0.58% and the long government bond yield is 1.84%. 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

When the dials point left, the credit environment is cautious and risks are priced higher.

Corporate bonds have the advantage over governments:
guageLong bonds are outperforming short bonds:

guage (1)

High quality bonds are preferable to high yield bonds:

guage (2)

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Australian Dollar (FXA), Canadian Dollar (FXC), Singapore Dollar (FXSG), Swedish Drona (FXS), and Euro (FXE) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds vs. US stocks: stocks have a better outlook.
guage (3)
Canadian bonds vs. Canadian stocks: stocks look better, today.
guage (4)

Global Markets

  • Australia has changed 6.88% in price since last week’s close.
  • Brazil has changed 7.64% in price since last week’s close.
  • Peru has changed 14.23% in price since last week’s close.
  • South Africa has changed 5.69% in price since last week’s close.

Comparing national stock markets, All Peru Et (EPU), Brazil Inde (EWZ), Turkey Investable (TUR), New Zealand (ENZL), Russia (ERUS), South Africa (EZA), Uae (UAE), Canada (EWC), Chile Inves (ECH), Sweden (EWD), Australia Fu (EWA), Philippines (EPHE), Denmark (EDEN), Belgium Inv (EWK), Malaysia Fun (EWM), Singapore Fu (EWS), Hong Kong Fu (EWH), Norway (ENOR), South Korea (EWY), Ishares Core S&p 500 (IVV), Thailand In (THD), India (INDA), Netherlands (EWN), China (MCHI), Ireland (EIRL), Israel Inve (EIS), Japan (EWJ), Switzerland (EWL), Mexico Inve (EWW), Qatar (QAT), Germany (EWG), Austria Inv (EWO), Indonesia (EIDO), France (EWQ), Finland (EFNL), Taiwan (EWT), United Kingdom (EWU) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,080.73. This is 1.90% higher than last week’s price (2,041.99), and 1.97% higher than last month’s price (2,040.59), and 10.66% higher than the price three months ago (1,880.33), and 4.34% higher than the price six months ago (1,994.24), and -2.12% lower than the price one year ago (2,125.85).The average P/E ratio of the S&P 100 (equal weighted) is 21.43. 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 4.67% (before dividends).

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

  • Amazon.com, Inc. (AMZN)
  • Caterpillar, Inc. (CAT)
  • Accenture Plc  (ACN)
  • Visa Inc. (V)
  • United Technologies Corporation (UTX)
  • Emerson Electric Company (EMR)
  • Devon Energy Corporation (DVN)
  • Texas Instruments (TXN)
  • FedEx Corporation  (FDX)
  • Mcdonald’s Corporation  (MCD)
  • Amgen Inc. (AMGN)
  • Blackrock, Inc.  (BLK)
  • Bristol-myers Squibb Company (BMY)
  • Honeywell International Inc. (HON)
  • 3M Company (MMM)
  • Merck & Company, Inc. (MRK)

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)

Canadian Stocks

Yesterday’s closing price was 13,637.20. This is 1.60% higher than last week’s price (13,422.80), and 0.12% higher than last month’s price (13,621.30), and 14.19% higher than the price three months ago (11,942.20), and -1.39% lower than the price six months ago (13,829.00), and -9.52% lower than the price one year ago (15,072.80).The average P/E ratio of the TSX60 (equal weighted) is 24.71. 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 4.05% (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)
  • Potash Corp Of Sask Inc (POT.to)
  • National Bank Of Canada (NA.to)

Other Assets

Base metals (ZMT.to), Silver (HUZ.to), TSX Capped REIT (XRE.to), S&P 500 (SPY), TSX Capped Composite E (ZCN.to), Canadian Universe Bond (XBB.to), Crude Oil (HUC.to), MSCI EAFE Cad-hedged (XIN.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
The oil price is rising, which increases manufacturing input costs and energy costs and may slow economic expansion.

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
  • 3 units (60%) bonds
Market Outlook, April 18, 2016

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