I don’t really like the outlook for bonds, but they are starting to look a little less gloomy. Stocks seem “toppy” and it’s hard to imagine them going much higher before experiencing a pullback. But that depends partly on earnings reports.

Interest Rates

The 3 month T-bill rate is 0.44%, the 1 year T-bill rate is 0.51%, the 3 year government bond yield is 0.94%, the 10 year government bond yield is 1.74% 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 1.74%. 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 1.33%. For small caps, it currently appears to be 1.99%.

Credit Environment

Corporate bonds are flat, which is better than in recent weeks.

Short bonds are almost flat, but long bonds are still falling.

High quality bonds are flat again, although high yield bonds are still looking up.

Currency

The Australian dollar (FXA) and Canadian dollar (FXC) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US stocks have the advantage over US bonds:

Canadian stocks likewise appear more appealing than Canadian bonds:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,351.16. This is 0.98% higher than last week’s price (2,328.25), and 3.52% higher than last month’s price (2,271.31), and 7.50% higher than the price three months ago (2,187.12), and 7.51% higher than the price six months ago (2,187.02), and 15.48% higher than the price one year ago (2,035.94).The average P/E ratio of the S&P 100 (equal weighted) is 22.20. 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)
  • Apple Inc. (AAPL)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Jp Morgan Chase & Co. Common St (JPM)
  • Allergan Plc Ordinary Shares (AGN)
  • Boeing Company (the) Common Sto (BA)
  • Cisco Systems, Inc. (CSCO)
  • Amgen Inc. (AMGN)
  • Citigroup, Inc. Common Stock (C)
  • U.s. Bancorp Common Stock (USB)
  • Capital One Financial Corporati (COF)
  • General Dynamics Corporation Co (GD)
  • The Kraft Heinz Company (KHC)
  • Philip Morris International Inc (PM)
  • Allstate Corporation (the) Comm (ALL)
  • Dow Chemical Company (the) Comm (DOW)
  • American Express Company Common (AXP)
  • Abbott Laboratories Common Stoc (ABT)
  • International Business Machines (IBM)
  • Costco Wholesale Corporation (COST)
  • Emerson Electric Company Common (EMR)
  • Amazon.com, Inc. (AMZN)
  • E.i. Du Pont De Nemours And Com (DD)
  • Caterpillar, Inc. Common Stock (CAT)
  • The Priceline Group Inc. (PCLN)
  • Wells Fargo & Company Common St (WFC)
  • Facebook, Inc. (FB)
  • Altria Group, Inc. (MO)
  • Visa Inc. (V)
  • Honeywell International Inc. Co (HON)

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 15,838.60. This is 0.52% higher than last week’s price (15,756.60), and 1.87% higher than last month’s price (15,547.90), and 6.56% higher than the price three months ago (14,864.00), and 7.78% higher than the price six months ago (14,695.70), and 18.38% higher than the price one year ago (13,379.50).The average P/E ratio of the TSX60 (equal weighted) is 32.58. 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 3.07% (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)
  • Barrick Gold Corporation (ABX.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Goldcorp Inc (G.to)
  • National Bank Of Canada (NA.to)
  • Restaurant Brands International (QSR.to)
  • Bank Of Nova Scotia (BNS.to)
  • Canadian Tire Corporation, Cl. (CTC-A.to)
  • Royal Bank Of Canada (RY.to)
  • Bank Of Montreal (BMO.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Eldorado Gold (ELD.to)
  • Encana Corp. (ECA.to)
  • Canadian Imperial Bank Of Comme (CM.to)
  • Power Corporation Of Canada, Sv (POW.to)
  • First Quantum Minerals Ltd (FM.to)
  • Manulife Financial (MFC.to)
  • TD Bank (TD.to)
  • Brookfield Asset Management Inc (BAM-A.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), Crude Oil (HUC.to), US Stocks (SPY), Silver (HUZ.to), Canadian Stocks (ZCN.to), Global Stocks (XIN.to), Real Estate (XRE.to), World Stocks (VDU.to), and Infrastructure (ZGI.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
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, February 20, 2017

Leave a Reply

Your email address will not be published. Required fields are marked *