After pausing for a short period, stocks appear poised to continue their climb. Near-term interest rates have begun to rise (the US Fed is signaling another rate hike some time this year), which is translating into price declines for bonds with maturity less than a year. Rising interest rates, however, indicate a positive outlook for economic growth, which will likely translate into optimism for corporate profits and rising stock prices. Having said that, the summer months are often slow, so it’s not likely to see a surge.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.44%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.54%, the 10 year government bond yield is 1.18% 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.

Expected (forward-looking) inflation is 1.50%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 3.10%. For small caps, it currently appears to be 0.87%.

Credit Environment

Short bonds are faltering and long bonds continue to perform.
Governments are doing better than corporates:guage1Long bonds are in favour far beyond short bonds:guage2High quality bonds are still preferable over high yield bonds:guage

Currency

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

Equities

Where does there appear to be more opportunity right now?
US bonds vs. US stocks:
guage4
Canadian bonds vs. Canadian stocks:
guage5

Global Markets

  • Brazil has changed 5.72% in price since last week’s close.
  • Peru has changed 5.18% in price since last week’s close.
  • Philippines has changed 5.07% in price since last week’s close.
  • South Africa has changed 6.65% in price since last week’s close.

Comparing national stock markets, Peru (EPU), Philippines (EPHE), New Zealand (ENZL), Belgium (EWK), South Africa (EZA), Denmark (EDEN), India (INDA), Canada (EWC), Taiwan (EWT), Thailand (THD), Netherlands (EWN), Switzerland (EWL), Norway (ENOR), Finland (EFNL), US S&P 500 (IVV), France (EWQ), Hong Kong (EWH), Indonesia (EIDO), Turkey (TUR), Sweden (EWD), Israel (EIS), Russia (ERUS), United Kingdom (EWU), Germany (EWG), Brazil (EWZ), and Australia (EWA) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,099.13. This is 0.00% higher than last week’s price (2,099.06), and 2.37% higher than last month’s price (2,050.63), and 4.86% higher than the price three months ago (2,001.76), and 0.94% higher than the price six months ago (2,079.51), and 2.33% higher than the price one year ago (2,051.31).The average P/E ratio of the S&P 100 (equal weighted) is 22.42. 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 4.46% (before dividends).

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

  • California Resources Corporation (CRC)
  • Monsanto Company (MON)
  • Devon Energy Corporation (DVN)
  • Amazon.com, Inc. (AMZN)
  • Halliburton Company (HAL)
  • Cisco Systems, Inc. (CSCO)
  • Allergan Plc (AGN)
  • Lowe’s Companies, Inc. (LOW)

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)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 14,226.80. This is 0.99% higher than last week’s price (14,086.70), and 4.36% higher than last month’s price (13,632.00), and 6.30% higher than the price three months ago (13,383.60), and 5.67% higher than the price six months ago (13,463.80), and -1.29% lower than the price one year ago (14,412.10).The average P/E ratio of the TSX60 (equal weighted) is 23.34. 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 4.28% (before dividends).

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

  • Barrick Gold Corporation (ABX.to)
  • Encana Corp. (ECA.to)
  • Kinross Gold Corp. (K.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Teck Resources Limited (TCK-B.to)
  • Eldorado Gold (ELD.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Silver Wheaton Corp. (SLW.to)
  • Pembina Pipeline Corporation (PPL.to)
  • Snc-lavalin Sv (SNC.to)
  • Crescent Point Energy Corp. (CPG.to)
  • First Quantum Minerals Ltd (FM.to)
  • Franco-nevada Corporation (FNV.to)
  • Cdn Natural Res (CNQ.to)
  • Inter Pipeline Ltd (IPL.to)
  • Metro Inc (MRU.to)
  • Arc Resources Ltd. (ARX.to)
  • Cgi Group Inc., Cl.a, Sv (GIB-A.to)
  • National Bank Of Canada (NA.to)

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)

Other Assets

Crude Oil (HUC.to), Global Infrastructure Etf (ZGI.to), TSX Composite (ZCN.to), TSX REITs (XRE.to), Natural Gas (HUN.to), US S&P 500 (SPY), Canadian Universe Bond (XBB.to), Vanguard FTSE Dev All Cap Ex U (VDU.to), MSCI EAFE (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$), US stocks (XSP hedged to Cdn$), 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
  • One unit (20%) international stocks
  • 1 unit (20%) bonds
Market Outlook, June 6, 2016

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