What an awful week. Stock markets didn’t perform well, but even worse were the two hurricanes that hit Hong Kong and Houston.

Interest Rates

The 3 month T-bill rate is 0.66%, the 1 year T-bill rate is 0.93%, the 3 year government bond yield is 1.35%, the 10 year government bond yield is 1.89% and the long government bond yield is 2.31%. 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 1.58%. 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 2.71%. For small caps, it currently appears to be 2.44%.

Credit Environment

Long corporate bonds and long government bonds appear to have some momentum.

Currency

The Swedish Krona (FXS), Euro (FXE), Brazilian Real (BZF), Australian Dollar (FXA), Canadian Dollar (FXC), Japanese Yen (FXY), Singapore Dollar (FXSG), 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 slightly more attractive than US stocks:

Canadian bonds likewise present better short-term opportunity than Canadian stocks:

Global Markets

  • Poland has changed 5.98% in price since last week’s close.
  • Turkey Investable has changed 5.05% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,443.45. This is 0.74% higher than last week’s price (2,425.55), and -1.16% lower than last month’s price (2,472.10), and 1.14% higher than the price three months ago (2,415.82), and 3.21% higher than the price six months ago (2,367.34), and 12.65% higher than the price one year ago (2,169.04).The average P/E ratio of the SP100 (equal weighted) is 24.95. 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 4.01% (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)
  • 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 15,076.20. This is 0.83% higher than last week’s price (14,952.30), and -0.35% lower than last month’s price (15,128.70), and -2.21% lower than the price three months ago (15,416.90), and -2.94% lower than the price six months ago (15,533.50), and 2.98% higher than the price one year ago (14,639.90).The average P/E ratio of the TSX60 (equal weighted) is 21.75. 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 4.60% (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)

Other Assets

Base Metals (ZMT.to), Global Stocks (XIN.to), International Stocks (VDU.to), Canadian Bonds (XBB.to), and Real Estate (XRE.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%) real estate
  • One unit (20%) international stocks
  • 3 units (60%) bonds
Market Outlook, August 28, 2017

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