Bonds have become moderately attractive again and no longer seem to be a losing proposition. Or, put differently, yields have fallen. The oil price has risen above $50 once again. Investors appear to be optimistic.

Interest Rates

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.58%, the 3 year government bond yield is 0.82%, the 10 year government bond yield is 1.55% and the long government bond yield is 2.23%. 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 1.62%. 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 2.05%. For small caps, it currently appears to be 2.12%.

Credit Environment

Bonds are finally offering positive returns. Corporate bonds are outperforming government bonds; long bonds are outperforming short bonds; and high yield (junk) bonds are slightly outperforming high quality (investment grade) bonds.

Currency

The Japanese Yen (FXY), Singapore Dollar (FXSG), and Chinese Yuan (FXCH) are looking strong relative to the US dollar.
The Canadian dollar has been losing value compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds present slightly less promise than US stocks:

Ditto Canadian bonds vs. Canadian stocks:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,355.54. This is -0.14% lower than last week’s price (2,358.84), and -0.72% lower than last month’s price (2,372.60), and 3.82% higher than the price three months ago (2,268.90), and 9.01% higher than the price six months ago (2,160.77), and 14.12% higher than the price one year ago (2,064.11).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):

  • Apple Inc. (AAPL)
  • Philip Morris International Inc (PM)
  • Amazon.com, Inc. (AMZN)
  • Boeing Company (the) (BA)
  • The Priceline Group Inc. (PCLN)

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 15,667.10. This is 0.53% higher than last week’s price (15,584.40), and 1.03% higher than last month’s price (15,506.70), and 1.56% higher than the price three months ago (15,426.30), and 7.34% higher than the price six months ago (14,595.50), and 13.63% higher than the price one year ago (13,788.20).The average P/E ratio of the TSX60 (equal weighted) is 27.76. 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 3.60% (before dividends).

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

Other Assets

Oil (HUC.to), Base Metals (ZMT.to), Silver (HUZ.to), Infrastructure (ZGI.to), Natural Gas (HUN.to), Real Estate (XRE.to), International Stocks (VDU.to), Global Stocks (XIN.to), Canadian Stocks (ZCN.to), US Stocks (SPY), and Canadian 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%) bonds
Market Outlook, April 10, 2017

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