Oil took a precipitous dive this week. Canadian stocks are struggling and world stocks may be taking a pause. US stocks are the only asset class that appear to be making headway. Bonds are still negative and other asset classes don’t look very promising.

Interest Rates

The 3 month T-bill rate is 0.42%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.97%, the 10 year government bond yield is 1.81% and the long government bond yield is 2.49%. 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 1.69%. 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 1.50%. For small caps, it currently appears to be 2.36%.

Credit Environment

Bonds are NOT where it’s at.

Currency

The US dollar is dominant. The Canadian dollar has been losing value compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US stocks are outshining US bonds, as they have been over the past few weeks:

Canadian stocks aren’t doing great, but bonds are worse:

Global Markets

  • Russia has changed -5.24% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,372.60. This is -0.11% lower than last week’s price (2,375.31), and 2.80% higher than last month’s price (2,307.87), and 5.63% higher than the price three months ago (2,246.19), and 8.77% higher than the price six months ago (2,181.30), and 13.92% higher than the price one year ago (2,082.78).The average P/E ratio of the S&P 100 (equal weighted) is 22.55. 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 4.43% (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 (BAC)
  • Boeing Company (the) (BA)
  • Apple Inc. (AAPL)
  • Amgen Inc. (AMGN)
  • Morgan Stanley (MS)
  • Eli Lilly And Company (LLY)
  • Philip Morris International Inc (PM)
  • Jp Morgan Chase & Co. (JPM)
  • Texas Instruments Incorporated (TXN)
  • The Priceline Group Inc. (PCLN)
  • Cisco Systems, Inc. (CSCO)
  • Lowe’s Companies, Inc. (LOW)
  • Johnson & Johnson (JNJ)
  • Altria Group, Inc. (MO)
  • Citigroup, Inc. (C)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Celgene Corporation (CELG)
  • Abbott Laboratories (ABT)
  • Unitedhealth Group Incorporated (UNH)
  • Colgate-palmolive Company (CL)
  • General Dynamics Corporation (GD)
  • Bristol-myers Squibb Company (BMY)
  • Medtronic Plc. Ordinary Shares (MDT)
  • Allstate Corporation (the) (ALL)
  • Abbvie Inc. (ABBV)
  • Amazon.com, Inc. (AMZN)
  • Dow Chemical Company (the) (DOW)
  • E.i. Du Pont De Nemours And Com (DD)
  • Visa Inc. (V)
  • Facebook, Inc. (FB)
  • Capital One Financial Corporati (COF)
  • Monsanto Company (MON)

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 15,506.70. This is -0.79% lower than last week’s price (15,629.80), and -0.71% lower than last month’s price (15,617.30), and 1.38% higher than the price three months ago (15,295.20), and 4.75% higher than the price six months ago (14,803.30), and 13.42% higher than the price one year ago (13,671.40).The average P/E ratio of the TSX60 (equal weighted) is 30.18. 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 3.31% (before dividends).

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

  • Teck Resources (TCK-B.to)
  • Restaurant Brands International (QSR.to)
  • Constellation Software Inc. (CSU.to)
  • Canadian Tire Corporation, Cl. (CTC-A.to)
  • Cdn Natural Resources (CNQ.to)
  • Canadian National Railway Co. (CNR.to)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Telus – (T.to)
  • TD Bank (TD.to)* This may be due to negative news. It may be a buying opportunity, or it may be “buyer beware.”

Other Assets

World Stocks (VDU.to), Infrastructure (ZGI.to), US Stocks (SPY), EAFE Stocks (XIN.to), and Canadian Stocks (ZCN.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
The oil price is falling, which benefits manufacturers, but hurts the Canadian economy.

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, March 13, 2017

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