Short interest rates have started to climb. Personally, I’ve witnessed this as rising rates on both savings accounts (promotional, of course), and mortgages. The yield curve is approaching the usual shape. As interest rates rise, bond prices will fall, which makes stocks appear attractive by comparison. But stocks are also looking expensive, having reached a 52-week high on Wednesday of last week.

Interest Rates

The 3 month T-bill rate is 0.44%, the 1 year T-bill rate is 0.49%, the 3 year government bond yield is 0.97%, the 10 year government bond yield is 1.78% and the long government bond yield is 2.43%. 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 1.77%. 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 1.59%. For small caps, it currently appears to be 2.07%.

Credit Environment

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

Currency

The Brazilian Real (BZF), Australian Dollar (FXA), Canadian Dollar (FXC), and Swedish Krona (FXS) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Stocks have much better momentum than bonds, in both the US:

and in Canada:

Global Markets

  • Mexico has changed 5.77% in price since last week’s close.
  • Poland has changed 5.25% 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), Brazil (EWZ), Poland (EPOL), Peru (EPU), Norway (ENOR), Austria (EWO), China (MCHI), South Korea (EWY), New Zealand (ENZL), Sweden (EWD), Canada (EWC), Australia (EWA), Germany (EWG), Saudi Arabia (KSA), Qatar (QAT), Thailand (THD), Hong Kong (EWH), UAE (UAE), US S&P 500 (IVV), South Africa (EZA), Israel (EIS), Chile (ECH), Switzerland (EWL), Ireland (EIRL), Spain (EWP), Finland (EFNL), France (EWQ), Philippines (EPHE), Denmark (EDEN), India (INDA), Netherlands (EWN), and Belgium (EWK) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,294.69. This is 1.30% higher than last week’s price (2,265.20), and 1.99% higher than last month’s price (2,249.92), and 7.58% higher than the price three months ago (2,133.04), and 5.74% higher than the price six months ago (2,170.06), and 15.11% higher than the price one year ago (1,993.40).The average P/E ratio of the S&P 100 (equal weighted) is 21.99. 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 4.55% (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)
  • Twenty-first Century Fox, Inc. (FOX)
  • Twenty-first Century Fox, Inc. (FOXA)
  • Goldman Sachs Group, Inc. (the) (GS)
  • General Dynamics Corporation Co (GD)
  • Comcast Corporation (CMCSA)
  • Amazon.com, Inc. (AMZN)
  • Boeing Company (the) Common Sto (BA)
  • The Priceline Group Inc. (PCLN)
  • Caterpillar, Inc. Common Stock (CAT)
  • Union Pacific Corporation Commo (UNP)
  • Jp Morgan Chase & Co. Common St (JPM)
  • Facebook, Inc. (FB)
  • Emerson Electric Company Common (EMR)
  • Metlife, Inc. Common Stock (MET)
  • General Motors Company Common S (GM)
  • Capital One Financial Corporati (COF)
  • International Business Machines (IBM)
  • Texas Instruments Incorporated (TXN)
  • Fedex Corporation Common Stock (FDX)
  • Dow Chemical Company (the) Comm (DOW)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • U.s. Bancorp Common Stock (USB)
  • American Express Company Common (AXP)
  • Wells Fargo & Company Common St (WFC)
  • E.i. Du Pont De Nemours And Com (DD)
  • Microsoft Corporation (MSFT)
  • Walt Disney Company (the) Commo (DIS)
  • Unitedhealth Group Incorporated (UNH)
  • Apple Inc. (AAPL)
  • 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 15,575.80. This is 0.62% higher than last week’s price (15,480.10), and 1.00% higher than last month’s price (15,422.10), and 5.35% higher than the price three months ago (14,785.30), and 7.08% higher than the price six months ago (14,546.50), and 19.65% higher than the price one year ago (13,017.90).The average P/E ratio of the TSX60 (equal weighted) is 29.70. 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 3.37% (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)
  • Cameco Corp (CCO.to)
  • Encana Corp. (ECA.to)
  • Manulife Financial Corporation (MFC.to)
  • National Bank Of Canada (NA.to)
  • Bank Of Montreal (BMO.to)
  • Bank Of Nova Scotia (BNS.to)
  • Royal Bank Of Canada (RY.to)
  • Goldcorp Inc (G.to)
  • Restaurant Brands International (QSR.to)
  • Td Us Small-cap Equity – I (TD.to)
  • Husky Energy Inc. (HSE.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)

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), Oil (HUC.to), US stocks (SPY), Global stocks (XIN.to), Canadian stocks (ZCN.to), Silver (HUZ.to), and International stocks (VDU.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 30, 2017

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