The Canadian stock market continues to struggle, while American stocks are doing fine and world stocks are doing a little better even. The Canadian dollar, however, is starting to gain a little ground compared to the US dollar. Oil does not look good.

Interest Rates

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.64%, the 3 year government bond yield is 0.96%, the 10 year government bond yield is 1.52% and the long government bond yield is 2.04%. 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 1.46%. 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 2.35%. For small caps, it currently appears to be 2.67%.

Credit Environment

Bonds are in greater favour than stocks. Corporate bonds are producing better returns (since they are riskier) than government bonds. Short bonds are not gaining, but long bonds are. And high quality bonds are performing better than high yield. This implies that the risk premium is being compressed, but bond prices are mainly reacting to movements in interest rates.

Currency

The Australian dollar (FXA), Euro (FXE), Canadian dollar (FXC), and Swiss franc (FXF) 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 are lagging US stocks for capital growth, which is normal:

Canadian bonds are outperforming Canadian stocks, which means the stock market is risky:

Global Markets

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

US Stocks

I wasn’t able to look at US stocks, due to technical difficulties.

Canadian Stocks

Yesterday’s closing price was 15,286.67. This is 0.62% higher than last week’s price (15,192.50), and -0.84% lower than last month’s price (15,416.90), and -1.01% lower than the price three months ago (15,442.70), and -0.27% lower than the price six months ago (15,328.20), and 10.04% higher than the price one year ago (13,891.90).The average P/E ratio of the TSX60 (equal weighted) is 25.84. 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 3.87% (before dividends).

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

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

  • TD Bank (TD.to)
  • Power Corporation Of Canada, Sv (POW.to)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

Global Stocks (XIN.to), International Stocks (VDU.to), US Stocks (SPY), Real Estate (XRE.to), Silver (HUZ.to), Infrastructure (ZGI.to), and Bonds (XBB.to)Ā 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%) real estate
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 2 units (40%) bonds
Market Outlook, June 19, 2017

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