The past week saw stock prices decline in Canada and the US. Canadian stocks appear to have paused in their upward trend. Since bond yields have remained low, bonds now look equally (un)attractive to stocks. The oil price seems to have recovered and gold is falling.

Interest Rates

The 3 month T-bill rate is 0.49%, the 1 year T-bill rate is 0.58%, the 3 year government bond yield is 0.83%, the 10 year government bond yield is 1.52% and the long government bond yield is 2.20%. 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 2.09%. For small caps, it currently appears to be 2.20%.

Credit Environment

Corporate bonds are outperforming government bonds. This makes sense, because they are more volatile and react to changes in yield with wider swings.

Long bonds are far outpacing short bonds. This is the meaning of duration.

High quality bonds are outperforming high yield bonds. Flight to quality, flight to safety.

Currency

The Japanese Yen (FXY), Chinese Yuan (FXCH), Singapore Dollar (FXSG), and British Pound (FXB) 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 and US stocks are balanced in their outlook:

Canadian bonds and Canadian stocks are in a similar equilibrium:

Global Markets

  • South Africa has changed 5.17% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,328.95. This is -1.13% lower than last week’s price (2,355.54), and -2.20% lower than last month’s price (2,381.38), and 2.39% higher than the price three months ago (2,274.64), and 8.87% higher than the price six months ago (2,139.18), and 13.74% higher than the price one year ago (2,047.63).The average P/E ratio of the S&P 100 (equal weighted) is 21.90. 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 4.57% (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)

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 $15,535.50. This is -0.84% lower than last week’s price ($15,667.10), and -0.17% lower than last month’s price ($15,562.40), and 0.36% higher than the price three months ago ($15,479.30), and 6.09% higher than the price six months ago ($14,643.70), and 11.63% higher than the price one year ago ($13,917.10).The average P/E ratio of the TSX60 (equal weighted) is 27.71. 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 3.61% (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)
  • Blackberry Limited (BB.to)
  • Dollarama Inc (DOL.to)
  • Eldorado Gold (ELD.to)
  • Barrick Gold Corporation (ABX.to)
  • Kinross Gold Corp. (K.to)
  • Canadian Tire Corporation, Cl. (CTC-A.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Restaurant Brands International (QSR.to)
  • Silver Wheaton Corp. (SLW.to)
  • Franco-nevada Corporation (FNV.to)
  • Agnico Eagle Mines Limited (AEM.to)

Other Assets

Crude Oil (HUC.to), Silver (HUZ.to), Global Infrastructure (ZGI.to), Real Estate (XRE.to), World Stocks (VDU.to), Natural Gas (HUN.to), Canadian Bonds (XBB.to), Canadian Stocks (ZCN.to), Global Stocks (XIN.to), US Stocks (SPY), and Base Metals (ZMT.to) are performing better than cash.
The gold price is falling, which probably indicates global optimism.
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 17, 2017

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