Interest rates continue to rise, especially at the short term. The stock market had a good week, with the TSX rising 1.5%. Stocks have done even better in other countries. It’s nice to see the positive returns, but that also means that stocks appear expensive to buy at the moment.

Interest Rates

The 3 month T-bill rate is 0.42%, the 1 year T-bill rate is 0.52%, the 3 year government bond yield is 0.78%, the 10 year government bond yield is 1.65% and the long government bond yield is 2.27%. 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 1.76%. 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 1.90%. For small caps, it currently appears to be 2.44%.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher.

Currency

The Brazilian Real (BZF), Canadian Dollar (FXC), and Chinese Yuan (FXCH) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

In both the US and Canada, stocks have a far better short-term outlook than bonds. This will likely persist through the end of the year and as long as interest rates are rising.
US bonds vs. US stocks:

Canadian bonds vs. Canadian stocks:

Global Markets

  • Chile has changed 5.25% in price since last week’s close.
  • Germany has changed 5.46% in price since last week’s close.
  • Italy has changed 6.15% in price since last week’s close.
  • Mexico has changed 6.06% in price since last week’s close.
  • Poland has changed 5.57% in price since last week’s close.
  • Russia has changed 6.35% in price since last week’s close.
  • South Africa has changed 5.10% in price since last week’s close.
  • Spain has changed 6.59% in price since last week’s close.
  • UAE has changed 6.31% in price since last week’s close.

Comparing national stock markets, Japan (EWJ), Malaysia (EWM), Russia (ERUS), Taiwan (EWT), Singapore (EWS), Italy (EWI), United Kingdom (EWU), Saudi Arabia (KSA), Canada (EWC), Norway (ENOR), Chile (ECH), UAE (UAE), US S&P 500 (IVV), Brazil (EWZ), Australia (EWA), Thailand (THD), South Africa (EZA), Indonesia (EIDO), Peru (EPU), Austria (EWO), South Korea (EWY), Sweden (EWD), France (EWQ), Poland (EPOL), Germany (EWG), China (MCHI), Spain (EWP), Mexico (EWW), New Zealand (ENZL), India (INDA), and Qatar (QAT) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,259.53. This is 2.49% higher than last week’s price (2,204.71), and 4.25% higher than last month’s price (2,167.48), and 6.23% higher than the price three months ago (2,127.02), and 8.68% higher than the price six months ago (2,079.06), and 20.17% higher than the price one year ago (1,880.33).The average P/E ratio of the S&P 100 (equal weighted) is 22.15. 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 4.51% (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 Com (BAC)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Morgan Stanley Common Stock (MS)
  • Halliburton Company Common Stoc (HAL)
  • Citigroup, Inc. Common Stock (C)
  • Jp Morgan Chase & Co. Common St (JPM)
  • Capital One Financial Corporati (COF)
  • Time Warner Inc. New Common Sto (TWX)
  • Conocophillips Common Stock (COP)
  • Metlife, Inc. Common Stock (MET)
  • General Motors Company Common S (GM)
  • Unitedhealth Group Incorporated (UNH)
  • U.s. Bancorp Common Stock (USB)
  • Fedex Corporation Common Stock (FDX)
  • Exelon Corporation Common Stock (EXC)
  • Wells Fargo & Company Common St (WFC)
  • Union Pacific Corporation Commo (UNP)
  • Chevron Corporation Common Stoc (CVX)
  • Caterpillar, Inc. Common Stock (CAT)
  • Boeing Company (the) Common Sto (BA)
  • General Dynamics Corporation Co (GD)
  • Target Corporation Common Stock (TGT)
  • Qualcomm Incorporated (QCOM)
  • Bank Of New York Mellon Corpora (BK)
  • E.i. Du Pont De Nemours And Com (DD)
  • Schlumberger N.v. Common Stock (SLB)
  • American Express Company Common (AXP)
  • Microsoft Corporation (MSFT)
  • Dow Chemical Company (the) Comm (DOW)
  • Walt Disney Company (the) Commo (DIS)
  • At&t Inc. (T)
  • Starbucks Corporation (SBUX)
  • United Parcel Service, Inc. Com (UPS)
  • American International Group, I (AIG)

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 15,312.20. This is 1.44% higher than last week’s price (15,095.20), and 5.20% higher than last month’s price (14,555.40), and 6.71% higher than the price three months ago (14,349.10), and 9.08% higher than the price six months ago (14,037.50), and 26.82% higher than the price one year ago (12,073.50).The average P/E ratio of the TSX60 (equal weighted) is 28.16. 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 3.55% (before dividends).

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

  • First Quantum Minerals Ltd (FM.to)
  • Encana Corp. (ECA.to)
  • Teck Resources Limited Cl B (TCK-B.to)
  • Magna International Inc (MG.to)
  • Manulife Fin (MFC.to)
  • National Bank Of Canada (NA.to)
  • Suncor Energy Inc. (SU.to)
  • Cameco Corp (CCO.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Restaurant Brands International (QSR.to)
  • Bank Of Montreal (BMO.to)
  • Potash Corp Of Sask Inc (POT.to)
  • Agrium Inc (AGU.to)
  • Bank Of Nova Scotia (BNS.to)
  • Cdn Natural Res (CNQ.to)
  • Imperial Oil (IMO.to)
  • Canadian National Railway Co. (CNR.to)
  • Sun Life Financial Inc. (SLF.to)
  • Canadian Imperial Bank Of Comme (CM.to)
  • Td Us Small-cap Equity – I (TD.to)
  • Husky Energy Inc. (HSE.to)
  • Cenovus Energy Inc. (CVE.to)
  • Loblaw Co (L.to)
  • Arc Resources Ltd. (ARX.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Royal Bank Of Canada (RY.to)
  • Weston George (WN.to)

Other Assets

Base Metals (ZMT.to), Crude Oil (HUC.to), Natural Gas (HUN.to), Global Stocks (XIN.to), Canadian Stocks (ZCN.to), US Stocks (SPY), Real Estate (XRE.to), International Stocks (VDU.to), Infrastructure (ZGI.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%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
Market Outlook, December 12, 2016

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