Superstition alert: Some people believe that as goes January (or the first week of January), so goes the year. It didn’t work last year, with a very profitable year following a bleak January. This year, the first week was positive. Having said that, stocks have run up quite a ways and don’t appear to be cheap. High prices will last if they are supported by positive earnings reports, but we won’t know whether or not that’s the case for a few weeks yet.

Interest Rates

The 3 month T-bill rate is 0.38%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.81%, the 10 year government bond yield is 1.67% and the long government bond yield is 2.26%. 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 1.79%. 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 1.85%. For small caps, it currently appears to be 2.24%.

Credit Environment

Even though stocks look a bit pricey, bonds seem to be headed lower in price, with the exception of high-yield (risky) bonds.

Currency

The US dollar is more bouyant than most currencies.
The Canadian dollar seems to be holding its own against the US dollar.

Equities

US bonds are currently less popular than US stocks:

Canadian bonds are out of favour, but Canadian stocks are in favour:

Global Markets

  • Philippines has changed 6.32% 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), Peru (EPU), Saudi Arabia (KSA), Qatar (QAT), Austria (EWO), Poland (EPOL), Germany (EWG), Norway (ENOR), Canada (EWC), France (EWQ), Thailand (THD), South Africa (EZA), USA (IVV), Finland (EFNL), Spain (EWP), Switzerland (EWL), Sweden (EWD), Ireland (EIRL), Denmark (EDEN), Netherlands (EWN), UAE (UAE), Australia (EWA), Belgium (EWK), and the Philippines (EPHE) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,276.98. This is 1.70% higher than last week’s price (2,238.83), and 1.59% higher than last month’s price (2,241.35), and 5.72% higher than the price three months ago (2,153.74), and 6.91% higher than the price six months ago (2,129.90), and 24.49% higher than the price one year ago (1,829.08).The average P/E ratio of the S&P 100 (equal weighted) is 22.30. 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 4.48% (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)
  • Morgan Stanley (MS)
  • Bank Of America Corporation (BAC)
  • Halliburton Company (HAL)
  • Jp Morgan Chase & Co. (JPM)
  • Citigroup, Inc. (C)
  • Capital One Financial Corporati (COF)
  • General Dynamics Corporation (GD)
  • Unitedhealth Group Incorporated (UNH)
  • Celgene Corporation (CELG)
  • Twenty-first Century Fox, Inc. (FOXA)
  • Boeing Company (the) (BA)
  • American Express Company (AXP)
  • Walt Disney Company (the) (DIS)
  • Time Warner Inc. New (TWX)
  • Bank Of New York Mellon Corpora (BK)
  • Kinder Morgan, Inc. (KMI)

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 $15,496.10. This is 1.36% higher than last week’s price (15,287.60), and 2.45% higher than last month’s price (15,125.80), and 6.17% higher than the price three months ago (14,595.50), and 8.89% higher than the price six months ago (14,231.10), and 26.16% higher than the price one year ago (12,282.70).The average P/E ratio of the TSX60 (equal weighted) is 28.38. 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 3.52% (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)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Encana Corp. (ECA.to)
  • Manulife Fin (MFC.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • National Bank Of Canada (NA.to)
  • Suncor Energy Inc. (SU.to)
  • Barrick Gold Corporation (ABX.to)
  • Sun Life Financial Inc. (SLF.to)
  • Td Us Small-cap Equity – I (TD.to)
  • Cameco Corp (CCO.to)
  • Eldorado Gold (ELD.to)
  • Royal Bank Of Canada (RY.to)
  • Bank Of Montreal (BMO.to)
  • Snc-lavalin Sv (SNC.to)
  • Inter Pipeline Ltd (IPL.to)

Other Assets

Crude Oil (HUC.to), Base Metals (ZMT.to), Global Stocks (XIN.to), Canadian Stocks (ZCN.to), US Stocks (SPY), Global Infrastructure (ZGI.to), Real Estate (XRE.to), International Stocks (VDU.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 9, 2017

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