The market doesn’t look too happy. We’re nearing the end of summer, so it’s not surprising that the market isn’t moving in a clear direction. And we’re also coming up to September & October, which is traditionally volatile.

Interest Rates

The 3 month T-bill rate is 0.68%, the 1 year T-bill rate is 0.90%, the 3 year government bond yield is 1.26%, 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 1.61%. 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 2.78%. For small caps, it currently appears to be 2.51%.

Credit Environment

Bonds are not looking good.

Currency

The Euro (FXE), Swedish Krona (FXS), Brazilian Real (BZF), Singapore Dollar (FXSG), Australian Dollar (FXA), Japanese Yen (FXY), and Canadian Dollar (FXC) 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 stocks have the advantage over bonds:

Whereas Canadian bonds look less bad than stocks:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,425.58. This is -0.64% lower than last week’s price (2,441.32), and -1.90% lower than last month’s price (2,472.54), and 1.84% higher than the price three months ago (2,381.73), and 3.17% higher than the price six months ago (2,351.16), and 11.07% higher than the price one year ago (2,183.87).The average P/E ratio of the SP100 (equal weighted) is 24.84. 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 4.03% (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)
  • Allstate Corporation (the) (ALL)
  • Raytheon Company (RTN)
  • Caterpillar, Inc. (CAT)
  • Facebook, Inc. (FB)
  • Lockheed Martin Corporation (LMT)
  • Apple Inc. (AAPL)

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 15,033.60. This is 0.00% higher than last week’s price (15,033.40), and -0.98% lower than last month’s price (15,183.10), and -2.75% lower than the price three months ago (15,458.50), and -5.08% lower than the price six months ago (15,838.60), and 2.36% higher than the price one year ago (14,687.50).The average P/E ratio of the TSX60 (equal weighted) is 21.62. 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 4.63% (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):

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

Other Assets

Base Metals (ZMT.to), Silver (HUZ.to), US Stocks (SPY), International Stocks (VDU.to), Global Stocks (XIN.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%) US stocks
  • One unit (20%) international stocks
  • 3 units (60%) cash
Market Outlook, August 21, 2017

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