2016 ended on a sour note, with the market falling 0.81% on the last day of the year. The last week, however, was essentially flat (-0.36%). December produced a return of +1.56%. For the entire year, the TSX returned 21.4%; not bad at all. (S&P 500 rose 19.1%.) Bonds, however, are unappealing. Canadian stocks and US stocks appear equally attractive, with US small caps especially well-positioned.

Interest Rates

The 3 month T-bill rate is 0.41%, the 1 year T-bill rate is 0.55%, the 3 year government bond yield is 0.85%, the 10 year government bond yield is 1.72% and the long government bond yield is 2.32%. 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 1.75%. For small caps, it currently appears to be 2.27%.

Credit Environment

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

Currency

The US dollar appears to be the strongest currency when compared against others.
The Canadian dollar has been losing value compared to the US dollar.

Equities

Both US stocks (first chart) and Canadian stocks (second chart) are in greater favour compared with bonds.

Global Markets

  • Indonesia has changed 5.83% in price since last week’s close.
  • Philippines has changed 5.50% in price since last week’s close.

Comparing national stock markets, Japan (EWJ), Malaysia (EWM), Russia (ERUS), Italy (EWI), United Kingdom (EWU), Taiwan (EWT), Singapore (EWS), Brazil (EWZ), Germany (EWG), Poland (EPOL), France (EWQ), Saudi Arabia (KSA), Peru (EPU), Austria (EWO), Qatar (QAT), Spain (EWP), Sweden (EWD), US S&P 500 (IVV), Finland (EFNL), Norway (ENOR), Netherlands (EWN), South Africa (EZA), Canada (EWC), Thailand (THD), Ireland (EIRL), UAE (UAE), Switzerland (EWL), and Chile (ECH) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,238.83. This is -1.10% lower than last week’s price (2,263.79), and 2.18% higher than last month’s price (2,191.08), and 3.59% higher than the price three months ago (2,161.20), and 6.46% higher than the price six months ago (2,102.95), and 19.08% higher than the price one year ago (1,880.05).The average P/E ratio of the S&P 100 (equal weighted) is 21.92. 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 4.56% (before dividends).

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

  • Goldman Sachs Group, Inc. (the) (GS)
  • Bank Of America Corporation Com (BAC)
  • Jp Morgan Chase & Co. Common St (JPM)
  • Morgan Stanley Common Stock (MS)
  • Citigroup, Inc. Common Stock (C)
  • Capital One Financial Corporati (COF)
  • Time Warner Inc. New Common Sto (TWX)
  • U.s. Bancorp Common Stock (USB)
  • Halliburton Company Common Stoc (HAL)
  • Wells Fargo & Company Common St (WFC)
  • Chevron Corporation Common Stoc (CVX)
  • At&t Inc. (T)
  • American Express Company Common (AXP)
  • Boeing Company (the) Common Sto (BA)
  • Conocophillips Common Stock (COP)
  • Microsoft Corporation (MSFT)
  • Metlife, Inc. Common Stock (MET)
  • Bank Of New York Mellon Corpora (BK)

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 15,287.60. This is -0.31% lower than last week’s price (15,335.20), and 1.36% higher than last month’s price (15,082.90), and 3.81% higher than the price three months ago (14,725.90), and 8.91% higher than the price six months ago (14,036.70), and 21.40% higher than the price one year ago (12,593.00).The average P/E ratio of the TSX60 (equal weighted) is 28.83. 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 3.47% (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):

Other Assets

Crude Oil (HUC.to), Natural Gas (HUN.to), Base Metals (ZMT.to), Global Stocks (XIN.to), Canadian Stocks (ZCN.to), US Stocks (SPY), International Stocks (VDU.to), Global Infrastructure (ZGI.to), Real Estate (XRE.to), and Gold (IGT.to) are performing better than cash.
The gold price is neutral.
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%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 1 unit (20%) cash
Market Outlook, January 3, 2017

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