Whereas June ended on a sour note for stocks, July has seen slow and steady growth. Stocks are more attractive than bonds as an investment at the present, and small caps in Canada look especially strong. The gold price has stopped advancing, and the oil price, which has been falling over the past three weeks, may be stabilizing.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.51%, the 3 year government bond yield is 0.52%, the 10 year government bond yield is 1.05% and the long government bond yield is 1.67%. 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 1.38%. 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 2.99%. For small caps, it currently appears to be 3.10%.

Credit Environment

Government bonds and corporate bonds are equally in favour.
guageLong bonds are far preferred to short bonds.

guage-1

High yield bonds have a bit better momentum than high quality bonds.guage-2

Currency

The Brazilian Real (BZF), Australian Dollar (FXA), Japanese Yen (FXY), and Canadian Dollar (FXC) 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?
In the US, stocks have the advantage over bonds:
guage-3
And the situation in Canada is similar:
guage-4

Global Markets

  • Austria has changed 6.93% in price since last week’s close.
  • Brazil has changed 5.40% in price since last week’s close.
  • Qatar has changed 5.01% in price since last week’s close.
  • Saudi Arabia has changed 6.23% in price since last week’s close.
  • South Africa has changed 5.40% in price since last week’s close.

Comparing national stock markets, Brazil (EWZ), Peru (EPU), Russia (ERUS), Taiwan (EWT), Indonesia (EIDO), Philippines (EPHE), South Africa (EZA), Thailand (THD), South Korea (EWY), New Zealand (ENZL), Chile (ECH), Australia (EWA), Canada (EWC), Singapore (EWS), China (MCHI), US S&P 500 (IVV), India (INDA), Turkey (TUR), Hong Kong (EWH), UAE (UAE), Israel (EIS), Japan (EWJ), Norway (ENOR), Mexico (EWW), Malaysia (EWM), Finland (EFNL), Qatar (QAT), and Denmark (EDEN) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,161.74. This is 1.15% higher than last week’s price (2,137.16), and 4.03% higher than last month’s price (2,077.99), and 3.22% higher than the price three months ago (2,094.34), and 12.48% higher than the price six months ago (1,921.84), and 3.95% higher than the price one year ago (2,079.61).The average P/E ratio of the S&P 100 (equal weighted) is 22.94. 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 4.36% (before dividends).

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

  • Kinder Morgan, Inc. (KMI)
  • Intel Corporation (INTC)
  • Lockheed Martin Corporation (LMT)
  • Amazon.com, Inc. (AMZN)
  • Halliburton Company (HAL)
  • Union Pacific Corporation (UNP)
  • Texas Instruments Incorporated (TXN)
  • Johnson & Johnson (JNJ)
  • 3m Company (MMM)
  • Altria Group, Inc. (MO)
  • Bristol-myers Squibb Company (BMY)
  • Simon Property Group, Inc. (SPG)
  • Pfizer, Inc. (PFE)
  • AT&T Inc. (T)
  • Chevron Corporation (CVX)
  • Comcast Corporation (CMCSA)
  • Medtronic Plc. (MDT)
  • Exelon Corporation (EXC)
  • General Electric Company (GE)
  • Exxon Mobil Corporation (XOM)
  • Emerson Electric Company (EMR)
  • Caterpillar, Inc. (CAT)
  • Unitedhealth Group Incorporated (UNH)
  • Verizon Communications Inc. (VZ)
  • United Parcel Service, Inc. (UPS)
  • Costco Wholesale Corporation (COST)
  • Morgan Stanley (MS)

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 14,482.40. This is 0.84% higher than last week’s price (14,361.90), and 4.32% higher than last month’s price (13,882.40), and 5.56% higher than the price three months ago (13,719.80), and 19.95% higher than the price six months ago (12,073.50), and 3.18% higher than the price one year ago (14,036.60).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)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

Crude Oil (HUC.to), Silver (HUZ.to), Base Metals (ZMT.to), Global Infrastructure (ZGI.to), Real Estate (XRE.to), TSX Composite (ZCN.to), S&P 500 (SPY), Natural Gas (HUN.to), International Stocks (XIN.to) and (VDU.to), Canadian Universe Bond (XBB.to), Premium Money Market C (CMR.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, July 18, 2016

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