The stock market had a good week. It may not be the end of October yet, but I feel safe saying that we’ve survived the traditionally scary September-October period. The outlook for US stocks isn’t quite as optimistic. Oil appears to have stabilized over $50.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.47%, the 1 year T-bill rate is 0.52%, the 3 year government bond yield is 0.56%, the 10 year government bond yield is 1.17% and the long government bond yield is 1.83%. 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 1.57%. 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 2.76%. For small caps, it currently appears to be 2.88%.

Credit Environment

Higher risk is producing a higher reward in bonds. Corporate bonds are in favour over government bonds:
guage

Short bonds and long bonds are equivalent:

guage-1

High yield bonds are in favour over high quality bonds:

guage-2

Currency

The US dollar is reigning supreme at the moment. 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 vs. US stocks:
guage-3
Canadian bonds vs. Canadian stocks:
guage-4

Global Markets

Comparing national stock markets, Brazil (EWZ), Mexico (EWW), Indonesia (EIDO), Taiwan (EWT), Norway (ENOR), Chile (ECH), Russia (ERUS), Austria (EWO), China (MCHI), Peru (EPU), Canada (EWC), Australia (EWA), Hong Kong (EWH), Japan (EWJ), India (INDA), Thailand (THD) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,141.16. This is 0.69% higher than last week’s price (2,126.50), and -1.09% lower than last month’s price (2,164.69), and -1.29% lower than the price three months ago (2,169.18), and 2.56% higher than the price six months ago (2,087.79), and 2.50% higher than the price one year ago (2,088.87).The average P/E ratio of the S&P 100 (equal weighted) is 20.23. This implies the market is fairly priced. This implies a forward capital return of 4.94% (before dividends).

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

  • Time Warner Inc. New Common Sto (TWX)
  • Halliburton Company Common Stoc (HAL)
  • Paypal Holdings, Inc. (PYPL)
  • Qualcomm Incorporated (QCOM)
  • Bank Of America Corporation Com (BAC)
  • Morgan Stanley Common Stock (MS)
  • Amazon.com, Inc. (AMZN)

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)

Canadian Stocks

Yesterday’s closing price was 14,939.00. This is 2.35% higher than last week’s price (14,596.50), and 0.96% higher than last month’s price (14,797.20), and 2.32% higher than the price three months ago (14,600.70), and 7.62% higher than the price six months ago (13,881.20), and 11.42% higher than the price one year ago (13,407.80).The average P/E ratio of the TSX60 (equal weighted) is 25.44. 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 3.93% (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), Natural Gas (HUN.to), Base Metals (ZMT.to), Canadian Stocks (ZCN.to), Global Stocks (XIN.to), Global Infrastructure (ZGI.to), International Stocks (VDU.to), Gold (IGT.to), and Canadian Bonds (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%) international stocks
  • 2 units (40%) cash
Market Outlook, October 24, 2016

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