Bond still appear unattractive while stocks seem to be taking a breather and are showing no real direction. Gold is retreating and oil continues to struggle.

Interest Rates

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.56%, the 3 year government bond yield is 0.86%, the 10 year government bond yield is 1.63% and the long government bond yield is 2.32%. 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 1.63%. 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 2.00%. For small caps, it currently appears to be 2.23%.

Credit Environment

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

Currency

The Australian dollar (FXA), Singapre dollar (FXSG), Japanese yen (FXY), and British pound (FXB) are looking strong relative to the US dollar.
The Canadian dollar seems to be holding its own against the US dollar.

Equities

While bonds have been flat, stocks are looking up, albeit moderately.
US bonds vs. US stocks:

Canadian bonds vs. Canadian stocks:

Global Markets

  • South Africa has changed -8.58% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,362.72. This is 0.90% higher than last week’s price (2,341.59), and -0.86% lower than last month’s price (2,383.12), and 5.53% higher than the price three months ago (2,238.83), and 9.84% higher than the price six months ago (2,151.13), and 15.22% higher than the price one year ago (2,050.63).The average P/E ratio of the S&P 100 (equal weighted) is 22.31. 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 4.48% (before dividends).

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

  • Twenty-first Century Fox, Inc. (FOXA)
  • Apple Inc. (AAPL)
  • Twenty-first Century Fox, Inc. (FOX)
  • The Priceline Group Inc. (PCLN)
  • Facebook, Inc. (FB)
  • Amazon.com, Inc. (AMZN)
  • Philip Morris International Inc (PM)
  • Oracle Corporation (ORCL)
  • Texas Instruments Incorporated (TXN)

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 15,547.80. This is 0.27% higher than last week’s price (15,506.20), and -0.39% lower than last month’s price (15,608.50), and 0.94% higher than the price three months ago (15,403.00), and 5.38% higher than the price six months ago (14,754.60), and 14.05% higher than the price one year ago (13,632.00).The average P/E ratio of the TSX60 (equal weighted) is 27.55. 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 3.63% (before dividends).

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

Other Assets

Silver (HUZ.to), Base Metals (ZMT.to), EAFE stocks (XIN.to), World Stocks (VDU.to), Global Infrastructure (ZGI.to), US Stocks (SPY), Oil (HUC.to), Natural Gas (HUN.to), Real Estate (XRE.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 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, April 3, 2017

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