The past week was a good one for the stock market. The TSX rose 1.46% and the US market, despite being closed for Thanksgiving, is also looking up. In fact, the US stock market appears to present the best opportunity for investors. It’s really looking up, as you’ll see by the long list of companies with positive momentum. I haven’t listed small caps, but they appear to have even greater momentum.

Interest Rates

Short term interest rates remain low, but medium term and long term rates have risen somewhat. You may notice that this curve has a more linear shape to it.yieldcurve

 

The 3 month T-bill rate is 0.46%, the 1 year T-bill rate is 0.54%, the 3 year government bond yield is 0.75%, the 10 year government bond yield is 1.59% and the long government bond yield is 2.18%. 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 1.81%. 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 1.99%. For small caps, it currently appears to be 2.50%.

Credit Environment

These dials look crazy, because the outlook for bonds is negative.
guageguage-1guage-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

US bonds are unlikely to grow as well as US stocks in the near term:
guage-3And the same holds true in Canada:guage-4

Global Markets

Comparing national stock markets, Japan (EWJ), Malaysia (EWM), Russia (ERUS), Taiwan (EWT), Singapore (EWS), Italy (EWI), Saudi Arabia (KSA), US S&P 500 (IVV), Australia (EWA), Canada (EWC), Peru (EPU) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,213.35. This is 1.44% higher than last week’s price (2,181.90), and 3.77% higher than last month’s price (2,133.04), and 1.51% higher than the price three months ago (2,180.38), and 5.44% higher than the price six months ago (2,099.06), and 8.29% higher than the price one year ago (2,043.94).The average P/E ratio of the S&P 100 (equal weighted) is 21.79. 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 4.59% (before dividends).

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

  • Bank Of America Corporation (BAC)
  • Morgan Stanley (MS)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Metlife, Inc. (MET)
  • Caterpillar, Inc. (CAT)
  • Citigroup, Inc. (C)
  • Jp Morgan Chase & Co. (JPM)
  • Union Pacific Corporation (UNP)
  • Capital One Financial Corporation (COF)
  • Celgene Corporation (CELG)
  • General Dynamics Corporation (GD)
  • Target Corporation (TGT)
  • Fedex Corporation (FDX)
  • Time Warner Inc. (TWX)
  • U.s. Bancorp (USB)
  • Unitedhealth Group Incorporated (UNH)
  • Bank Of New York Mellon Corpora (BK)
  • Wells Fargo & Company (WFC)
  • Comcast Corporation (CMCSA)
  • American Express Company (AXP)
  • Halliburton Company (HAL)
  • Raytheon Company (RTN)
  • Lockheed Martin Corporation (LMT)
  • Chevron Corporation (CVX)
  • Kinder Morgan, Inc. (KMI)
  • United Parcel Service, Inc. (UPS)
  • General Motors Company (GM)
  • Texas Instruments Incorporated (TXN)
  • Emerson Electric Company (EMR)
  • Twenty-first Century Fox, Inc. (FOXA)
  • Boeing Company (the) (BA)

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 15,075.40. This is 0.24% higher than last week’s price (15,039.90), and 1.96% higher than last month’s price (14,785.30), and 2.68% higher than the price three months ago (14,682.00), and 6.88% higher than the price six months ago (14,105.20), and 15.88% higher than the price one year ago (13,010.00).The average P/E ratio of the TSX60 (equal weighted) is 27.92. 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 3.58% (before dividends).

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

  • Teck Resources Limited Cl B (TCK-B.to)
  • First Quantum Minerals Ltd (FM.to)
  • Encana Corp. (ECA.to)
  • Manulife Fin (MFC.to)
  • Sun Life Financial Inc. (SLF.to)
  • Restaurant Brands International (QSR.to)
  • Potash Corp Of Sask Inc (POT.to)
  • Royal Bank Of Canada (RY.to)
  • Cameco Corp (CCO.to)
  • Thomson Reuters Corporation (TRI.to)
  • Td Us Small-cap Equity – I (TD.to)
  • Agrium Inc (AGU.to)
  • Canadian National Railway Co. (CNR.to)

Other Assets

Base Metals (ZMT.to), Crude Oil (HUC.to), US Stocks (SPY), Canadian Stocks (ZCN.to), Global Stocks (XIN.to), Infrastructure (ZGI.to), 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
  • 2 units (40%) cash
Market Outlook, November 28, 2016

Leave a Reply

Your email address will not be published. Required fields are marked *