I don’t like the look of the market. Bond values are falling as interest rates rise (a little). Stocks are pulling back, though not sliding into a correction. Gold is falling and oil has fallen 3.6% over the past week and 9.5% over a month. Having said that, this isn’t the time to panic, but a time for patience. The US$ is rising against the CDN$, making US stocks more attractive; US small caps are outperforming large caps.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.46%, 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 1.20% 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 1.49%. 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 2.93%. For small caps, it currently appears to be 2.95%.

Credit Environment

Corporate bonds are performing less badly than government bonds. High yield bonds are doing better than high quality. And short bonds are falling less quickly than long bonds, which is normal when interest rates begin to rise.
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Currency

Only the Brazilian Real (BZF) and Japanese Yen (FXY) are looking strong relative to the US dollar.
The Canadian dollar has been losing value compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds and US stocks are both doing nothing:
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Canadian stocks (to the right) are slightly positive, which is better than bonds:
guage-4

Global Markets

  • Italy has changed -5.35% in price since last week’s close.

Comparing national stock markets, Hong Kong (EWH), China (MCHI), Brazil (EWZ), New Zealand (ENZL), Taiwan (EWT), India (INDA), Indonesia (EIDO), Russia (ERUS), Austria (EWO), Peru (EPU), Belgium (EWK), South Korea (EWY), Japan (EWJ), Finland (EFNL), and US S&P 500 (IVV) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,139.16. This is -0.92% lower than last week’s price (2,159.04), and -2.19% lower than last month’s price (2,187.02), and 2.68% higher than the price three months ago (2,083.25), and 4.37% higher than the price six months ago (2,049.58), and 5.95% higher than the price one year ago (2,018.94).The average P/E ratio of the S&P 100 (equal weighted) is 21.31. 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 4.69% (before dividends).

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

  • Intel Corporation (INTC)
  • Amazon.com, Inc. (AMZN)
  • Facebook, Inc. (FB)
  • Morgan Stanley Common Stock (MS)
  • Apple Inc. (AAPL)
  • Paypal Holdings, Inc. (PYPL)

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

  • General Motors Company Common S (GM)
  • Ford Motor Company Common Stock (F)
  • Chevron Corporation Common Stoc (CVX)

Canadian Stocks

Yesterday’s closing price was 14,450.70. This is -1.00% lower than last week’s price (14,597.10), and -1.67% lower than last month’s price (14,695.70), and 3.95% higher than the price three months ago (13,901.80), and 6.09% higher than the price six months ago (13,621.30), and 5.45% higher than the price one year ago (13,704.20).The average P/E ratio of the TSX60 (equal weighted) is 24.19. 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 4.13% (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), Global Infrastructure (ZGI.to), Base Metals (ZMT.to), Natural Gas (HUN.to), Global Stocks (VDU.to), Canadian Stocks (ZCN.to), International Stocks (XIN.to), Silver (HUZ.to), and the US S&P 500 (SPY) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks, but in this case seems more likely to be a drawdown to cash.

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%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 2 units (40%) cash
Market Outlook, September 19, 2016

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