The stock market doesn’t like uncertainty, and I think it may be fair to say that it especially doesn’t like nuclear uncertainty. Stocks fell last week, but they remain in an upward trend and are now less expensive than last week. Oil is also now in an upward trend since late June, but the trend since March is downward and it hasn’t broken out of those technical bounds.

Interest Rates

The 3 month T-bill rate is 0.67%, the 1 year T-bill rate is 0.91%, the 3 year government bond yield is 1.25%, the 10 year government bond yield is 1.85% and the long government bond yield is 2.29%. 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 1.65%. 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 2.79%. For small caps, it currently appears to be 2.49%.

Credit Environment

Bonds are pretty sucky at the moment.

Currency

The Swedish Krona (FXS), Euro (FXE), Singapore Dollar (FXSG), Brazilian Real (BZF), Australia Dollar (FXA), Canada Dollar (FXC), and Japanese Yen (FXY) 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 vs. US stocks:

Canadian bonds vs. Canadian stocks:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,441.53. This is -1.43% lower than last week’s price (2,476.83), and -0.72% lower than last month’s price (2,459.27), and 2.12% higher than the price three months ago (2,390.90), and 5.42% higher than the price six months ago (2,316.10), and 11.79% higher than the price one year ago (2,184.05).The average P/E ratio of the SP100 (equal weighted) is 25.05. 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 3.99% (before dividends).

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

  • Boeing Company (the) (BA)
  • Paypal Holdings, Inc. (PYPL)
  • Facebook, Inc. (FB)
  • Morgan Stanley (MS)
  • Allstate Corporation (the) (ALL)
  • Caterpillar, Inc. (CAT)
  • The Priceline Group Inc. (PCLN)
  • Unitedhealth Group Incorporated (UNH)
  • Citigroup, Inc. (C)
  • Bank Of New York Mellon Corpora (BK)
  • Verizon Communications Inc. (VZ)
  • Mastercard Incorporated (MA)
  • Visa Inc. (V)
  • Exelon Corporation (EXC)

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 15,074.30. This is -1.20% lower than last week’s price (15,258.00), and -0.66% lower than last month’s price (15,174.80), and -2.98% lower than the price three months ago (15,537.90), and -4.16% lower than the price six months ago (15,729.10), and 2.22% higher than the price one year ago (14,747.50).The average P/E ratio of the TSX60 (equal weighted) is 21.56. 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 4.64% (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 (TECK-B.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Constellation Software Inc. (CSU.to)

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

  • Telus – (T.to)
  • TD Bank (TD.to)
  • Power Corporation Of Canada, Sv (POW.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Canadian Imperial Bank Of Comme (CM.to)
  • Cenovus Energy Inc. (CVE.to)

Other Assets

Base Metals (ZMT.to), US Stocks (SPY), Global Stocks (XIN.to), International Stocks (VDU.to), Global Infrastructure (ZGI.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 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%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 2 units (40%) cash
Market Outlook, August 14, 2017

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