The stock market fell less than 1% over the past week. Looking back to the beginning of the month, it’s risen less than 1% since that time. The general view seems a little gloomy, and September and October are just about upon us. I don’t expect great things from the stock market for the next few weeks.

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 0.59%, the 10 year government bond yield is 1.06% 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 1.41%. 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 2.92%. For small caps, it currently appears to be 3.10%.

Credit Environment

With yields so very low, investors seem to be moving money into longer bonds. If they are increasing the duration, they either feel that the additional risk is justified, or that there is little risk of interest rates rising.
guageguage-1guage-2

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Australian dollar (FXA), and Canadian dollar (FXC) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

US stocks are in slightly greater favour than US bonds:
guage-3
And Canadian stocks appear to have a slight advantage over Canadian bonds:
guage-4

Global Markets

  • All Peru Et has changed -5.74% in price since last week’s close.
  • South Africa has changed -7.70% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,169.04. This is -0.62% lower than last week’s price (2,182.64), and -0.21% lower than last month’s price (2,173.60), and 3.44% higher than the price three months ago (2,096.95), and 12.26% higher than the price six months ago (1,932.23), and 12.75% higher than the price one year ago (1,923.82).The average P/E ratio of the S&P 100 (equal weighted) is 21.68. 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 4.61% (before dividends).

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

  • Merck & Company, Inc. (MRK)
  • Morgan Stanley (MS)
  • Bank Of America Corporation (BAC)
  • Amazon.com, Inc. (AMZN)
  • Texas Instruments Incorporated (TXN)
  • Kinder Morgan, Inc. (KMI)
  • The Priceline Group Inc. (PCLN)
  • Biogen Inc. (BIIB)

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 14,639.90. This is -0.73% lower than last week’s price (14,748.20), and 0.60% higher than last month’s price (14,552.70), and 3.93% higher than the price three months ago (14,086.70), and 14.39% higher than the price six months ago (12,797.80), and 10.02% higher than the price one year ago (13,307.00).The average P/E ratio of the TSX60 (equal weighted) is 25.15. 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 3.98% (before dividends).

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

  • Teck Resources Limited (TCK-B.to)
  • Encana Corp. (ECA.to)
  • Silver Wheaton Corp. (SLW.to)
  • First Quantum Minerals Ltd (FM.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Alimentation Couche-tard Inc Cl (ATD-B.to)
  • Valeant Pharmaceuticals Intl In (VRX.to)
  • Cdn Natural Res (CNQ.to)
  • Saputo Inc. (SAP.to)
  • Restaurant Brands International (QSR.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • National Bank Of Canada (NA.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Bank Of Nova Scotia (BNS.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)

Other Assets

Crude Oil (HUC.to), Base Metals (ZMT.to), Canadian Stocks TSX (ZCN.to), Natural Gas (HUN.to), US Stocks S&P 500 (SPY), Global Infrastructure (ZGI.to), Silver (HUZ.to), MSCI EAFE (XIN.to), Gold (IGT.to), World ex-US (VDU.to), and Canadian Universe Bond (XBB.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
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%) of gold
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 1 unit (20%) cash
Market Outlook, August 29, 2016

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