Happy Hallowe’en! The markets look suitably scary today. The oil price fell 6.0% over the past week. The stock market also fell, although by only 1.0%, and the outlook is negative for US and global stocks and Canadian small caps (large caps as a group look okay). The outlook for bonds is negative, too.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.52%, the 3 year government bond yield is 0.59%, the 10 year government bond yield is 1.23% and the long government bond yield is 1.88%. 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 1.60%. 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 2.88%. For small caps, it currently appears to be 2.94%.

Credit Environment

The outlook for bonds, every time and every duration, is negative.
guageguage-1guage-2

Currency

The US dollar is presently the currency with the strongest outlook. This implies an aversion to risk and a preference for safety.
The Canadian dollar has been losing value compared to the US dollar.

Equities

Neither US bonds nor US stocks present an optimistic picture:
guage-3
Only Canadian stocks show any promise:
guage-4

Global Markets

Comparing national stock markets, Brazil (EWZ), Chile (ECH), Taiwan (EWT), Austria (EWO), Japan (EWJ), Mexico (EWW), Indonesia (EIDO), Saudi Arabia (KSA), Russia (ERUS), Spain (EWP), Norway (ENOR), Hong Kong (EWH), China (MCHI), and Poland (EPOL) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,126.41. This is -1.16% lower than last week’s price (2,151.33), and -1.93% lower than last month’s price (2,168.27), and -1.42% lower than the price three months ago (2,157.03), and 2.16% higher than the price six months ago (2,081.43), and 3.75% higher than the price one year ago (2,049.62).The average P/E ratio of the S&P 100 (equal weighted) is 20.52. 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 4.87% (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 (TWX)
  • Goldman Sachs Group, Inc. (GS)
  • Bank Of New York Mellon (BK)
  • Morgan Stanley (MS)
  • Bank Of America (BAC)

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)

Canadian Stocks

Yesterday’s closing price was 14,785.30. This is -0.92% lower than last week’s price (14,923.00), and 0.21% higher than last month’s price (14,754.60), and 1.39% higher than the price three months ago (14,582.70), and 6.47% higher than the price six months ago (13,886.40), and 8.43% higher than the price one year ago (13,636.10).The average P/E ratio of the TSX60 (equal weighted) is 24.33. 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 4.11% (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 Commerce (CM.to)

Other Assets

Crude Oil (HUC.to), Base Metals (ZMT.to), Canadian Stocks (ZCN.to), Global Infrastructure (ZGI.to), Global Stocks (XIN.to), Gold (IGT.to), and International Stocks (VDU.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 31, 2016

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