Interest rates look like they are continuing to rise. That brings down bond prices, and if it continues, it will be very hard to earn a positive return on bonds without holding them to maturity (bond ETFs won’t work).

Interest Rates

The 3 month T-bill rate is 0.42%, the 1 year T-bill rate is 0.50%, the 3 year government bond yield is 0.84%, the 10 year government bond yield is 1.74% and the long government bond yield is 2.38%. 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 1.70%. For small caps, it currently appears to be 2.16%.

Credit Environment

All the bond categories, apart from high yield (junk) have negative momentum. Keep in mind that investing (speculating) in junk bonds is a very different strategy from investing in other categories of bonds.

Currency

The Brazilian Real (BZF), Australian Dollar (FXA), Swedish Krona (FXS), Swiss Franc (FXF), Canadian Dollar (FXC), and Euro (FXE) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar. (And I hope it keeps up, since I’m planning a trip to the US in a couple weeks.)

Equities

Where does there appear to be more opportunity right now?
US bonds vs. US stocks: stocks are positioned to outperform bonds.

Canadian bonds vs. Canadian stocks: likewise.

Global Markets

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

US Stocks

Yesterday’s closing price was 2,271.31. This is -0.15% lower than last week’s price (2,274.64), and 0.02% higher than last month’s price (2,270.76), and 6.07% higher than the price three months ago (2,141.34), and 4.90% higher than the price six months ago (2,165.17), and 16.38% higher than the price one year ago (1,951.70).

The average P/E ratio of the S&P 100 (equal weighted) is 22.17. 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)
  • Morgan Stanley Common Stock (MS)
  • Halliburton Company Common Stoc (HAL)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Union Pacific Corporation Commo (UNP)
  • General Dynamics Corporation Co (GD)
  • Twenty-first Century Fox, Inc. (FOXA)
  • General Motors Company Common S (GM)
  • Comcast Corporation (CMCSA)
  • Twenty-first Century Fox, Inc. (FOX)
  • Boeing Company (the) Common Sto (BA)
  • Conocophillips Common Stock (COP)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • American Express Company Common (AXP)
  • Emerson Electric Company Common (EMR)
  • The Priceline Group Inc. (PCLN)
  • Mastercard Incorporated Common (MA)

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 15,547.90. This is 0.44% higher than last week’s price (15,479.30), and 1.67% higher than last month’s price (15,293.00), and 4.08% higher than the price three months ago (14,939.00), and 6.98% higher than the price six months ago (14,533.60), and 22.04% higher than the price one year ago (12,740.30).The average P/E ratio of the TSX60 (equal weighted) is 29.08. 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 3.44% (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

Base Metals (ZMT.to), Crude Oil (HUC.to), Silver (HUZ.to), Canadian Stocks (ZCN.to), US Stocks (SPY), Global Stocks (XIN.to), International Stocks (VDU.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%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 2 units (40%) cash
Market Outlook, January 23, 2017

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