I have to admit that I was surprised at the market’s reaction, or lack of reaction, to the US presidential election. I sold the small US ETF that I owned, and now I have to decide whether I buy back into the S&P 500 or if there’s a better opportunity. Even though US and Canadian stocks are looking up, international stocks and oil are not. Bond yields have risen a little, as has inflation. If the economy is recovering or heating up, look for inflation to continue to rise and interest rates along with it.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.44%, the 1 year T-bill rate is 0.50%, the 3 year government bond yield is 0.67%, the 10 year government bond yield is 1.43% and the long government bond yield is 2.07%. 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 1.78%. 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 2.26%. For small caps, it currently appears to be 2.88%.

Credit Environment

Government bonds and corporate bonds are both losing value. In other words, interest rates are rising.
guage

Long bonds are losing value faster than short bonds, as the duration would lead us to expect.

guage-1

High quality and high yield bonds are also both negative. Interest rates haven’t risen much (yet), but all bonds react to rising rates with falling values.

guage-2

Currency

The US dollar currently appears to be the strongest currency.
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 are less attractive than US stocks:
guage-3
Canadian bonds are underperforming Canadian stocks:
guage-4

Global Markets

  • Brazil Inde has changed -10.52% in price since last week’s close.
  • India has changed -5.73% in price since last week’s close.
  • Indonesia has changed -9.19% in price since last week’s close.
  • Mexico Inve has changed -11.67% in price since last week’s close.
  • Philippines has changed -5.62% in price since last week’s close.
  • Poland has changed -5.49% in price since last week’s close.
  • Saudi Arabia Cappe has changed 8.38% in price since last week’s close.
  • South Africa has changed -7.91% in price since last week’s close.
  • Comparing national stock markets, Japan (EWJ), Malaysia Fun (EWM), Russia (ERUS), Taiwan (EWT), Italy (EWI), United Kingdom (EWU), Singapore Fu (EWS), Saudi Arabia Cappe (KSA), All Peru Et (EPU), Austria Inv (EWO), Ishares Core S&p 500 (IVV) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,164.45. This is 1.54% higher than last week’s price (2,131.52), and 1.48% higher than last month’s price (2,132.98), and -0.63% lower than the price three months ago (2,178.15), and 4.73% higher than the price six months ago (2,066.66), and 6.00% higher than the price one year ago (2,041.89).The average P/E ratio of the S&P 100 (equal weighted) is 21.30. 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):

  • Morgan Stanley (MS)
  • Bank Of America Corporation (BAC)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Metlife, Inc. (MET)
  • Bank Of New York Mellon (BK)
  • Celgene Corporation (CELG)
  • Jp Morgan Chase & Co. (JPM)
  • Capital One Financial (COF)
  • American Express Company (AXP)
  • General Dynamics Corporation (GD)
  • U.S. Bancorp (USB)
  • Wells Fargo & Company (WFC)
  • Caterpillar, Inc. (CAT)
  • Citigroup, Inc. (C)
  • Boeing Company (the) (BA)
  • Time Warner Inc. New (TWX)
  • The Priceline Group Inc. (PCLN)
  • Biogen Inc. (BIIB)
  • Unitedhealth Group Incorporated (UNH)
  • Fedex Corporation (FDX)
  • Emerson Electric Company (EMR)
  • Lockheed Martin Corporation (LMT)
  • Raytheon Company (RTN)
  • Qualcomm Incorporated (QCOM)

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 14,555.40. This is -0.66% lower than last week’s price (14,652.50), and -0.20% lower than last month’s price (14,585.00), and -1.50% lower than the price three months ago (14,777.00), and 5.57% higher than the price six months ago (13,787.80), and 12.66% higher than the price one year ago (12,919.60).The average P/E ratio of the TSX60 (equal weighted) is 27.11. 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 3.69% (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

Base Metals (ZMT.to), Crude Oil (HUC.to), US Stocks (SPY), Global Stocks (VDU.to), Canadian Stocks (ZCN.to), and Gold (IGT.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, November 14, 2016

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