The stock market appears to be slowing or taking a pause. Bonds appear to be making some small progress. While stocks have run up quite a ways and have sparked much positive sentiment, I feel it is time to be cautious, especially in Canadian stocks. American stocks have more momentum and appear less expensive, relatively.

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 0.91%, the 10 year government bond yield is 1.67% and the long government bond yield is 2.40%. 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 1.73%. 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 1.63%. For small caps, it currently appears to be 2.16%.

Credit Environment

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

Corporate bonds are looking up, while government bonds are not.

Long-term bonds have positive momentum, where short-term bonds are flat.

High yield bonds have slightly greater favour over high-quality bonds, but both are positive for the first time in the last few weeks.

Currency

The Brazilian Real (BZF), Australian dollar (FXA), Japanese Yen (FXY), 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 bonds vs. US stocks:

Canadian bonds vs. Canadian stocks:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,367.34. This is 0.69% higher than last week’s price (2,351.16), and 3.08% higher than last month’s price (2,296.68), and 7.38% higher than the price three months ago (2,204.72), and 8.82% higher than the price six months ago (2,175.44), and 14.93% higher than the price one year ago (2,059.74).The average P/E ratio of the S&P 100 (equal weighted) is 22.45. 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 4.46% (before dividends).

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

  • Apple Inc. (AAPL)
  • Bank Of America Corporation (BAC)
  • Allergan Plc Ordinary Shares (AGN)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Morgan Stanley (MS)
  • Boeing Company (the) (BA)
  • Philip Morris International Inc (PM)
  • Amgen Inc. (AMGN)
  • Abbott Laboratories (ABT)
  • Cisco Systems, Inc. (CSCO)
  • Jp Morgan Chase & Co. (JPM)
  • Eli Lilly And Company (LLY)
  • Costco Wholesale Corporation (COST)
  • Colgate-palmolive Company (CL)
  • Bristol-myers Squibb Company (BMY)
  • Allstate Corporation (the) (ALL)
  • Capital One Financial Corporati (COF)
  • U.s. Bancorp (USB)
  • Nextera Energy, Inc. (NEE)
  • Dow Chemical Company (the) (DOW)
  • American Express Company (AXP)
  • Altria Group, Inc. (MO)
  • Citigroup, Inc. (C)
  • General Dynamics Corporation (GD)
  • Exelon Corporation (EXC)
  • Pfizer, Inc. (PFE)
  • Johnson & Johnson (JNJ)
  • Paypal Holdings, Inc. (PYPL)
  • Merck & Company, Inc. (new) (MRK)
  • Visa Inc. (V)
  • Nike, Inc. (NKE)

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 $15,533.50. This is -1.93% lower than last week’s price (15,838.60), and -0.53% lower than last month’s price (15,615.50), and 3.04% higher than the price three months ago (15,075.20), and 6.20% higher than the price six months ago (14,626.20), and 15.03% higher than the price one year ago (13,504.00).The average P/E ratio of the TSX60 (equal weighted) is 30.34. 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 3.30% (before dividends).

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

  • Teck Cominco (TCK-B.to)
  • Barrick Gold Corporation (ABX.to)
  • Restaurant Brands International (QSR.to)
  • Canadian Tire Corporation, Cl. (CTC-A.to)
  • National Bank Of Canada (NA.to)
  • Goldcorp Inc (G.to)
  • Canadian Imperial Bank Of Comme (CM.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)

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), Silver (HUZ.to), US Stocks (SPY), Base Metals (ZMT.to), Real Estate (XRE.to), Global Stocks (XIN.to), Infrastructure (ZGI.to), Canadian Stocks (ZCN.to), World Stocks (VDU.to), and Bonds (XBB.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 27, 2017

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