Canadian stocks have fallen 0.9% over the past week. Canadian bonds fell 1.4%. June is historically a bad month for market returns, and we’ve seen that again this year. July and August generally go nowhere, and then September and October are often very volatile (up or down).
The 3 month T-bill rate is 0.50%, the 1 year T-bill rate is 0.81%, the 3 year government bond yield is 1.16%, the 10 year government bond yield is 1.70% and the long government bond yield is 2.11%. 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 1.50%. 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 2.15%. For small caps, it currently appears to be 2.45%.
Government bonds are performing okay, but corporate bonds are doing better; long bonds are far outpacing short bonds; and high quality bonds are outperforming high yield bonds.
The Canadian dollar has been appreciating compared to the US dollar.
Where does there appear to be more opportunity right now?
US bonds vs. US stocks:
Canadian bonds vs. Canadian stocks:
The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):
- Valeant Pharmaceuticals Intl In (VRX.to)
- Gildan Activewear Inc. (GIL.to)
- Restaurant Brands International (QSR.to)
- Shaw Communications Inc., Cl.b, (SJR-B.to)
These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):
The gold price is falling, which may indicate bullishness toward stocks.
The oil price is falling, which benefits manufacturers, but hurts the Canadian economy.
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%) US stocks
- One unit (20%) international stocks
- 3 units (60%) bonds