It looks like interest rates will continue to rise. That’s good for the Canadian dollar and the exchange rate, but it’s not so good for bond investments or preferred shares. Financials might also be less profitable going forward, although banks seem to always find a way to make money. There was also the nuclear scare from North Korea, so gold and other safety hedges are in greater demand. Investors don’t like uncertainty.

Interest Rates

The 3 month T-bill rate is 0.68%, the 1 year T-bill rate is 0.99%, the 3 year government bond yield is 1.41%, the 10 year government bond yield is 1.91% and the long government bond yield is 2.30%. 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 1.59%. 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 2.70%. For small caps, it currently appears to be 2.19%.

Credit Environment

Bond prices are falling as interest rates rise. The exception to that may be high yield bonds, if the risk premium is shrinking.

Currency

The Canadian Dollar (FXC), Swedish Krona (FXS), Brazilian Real (BZF), Euro (FXE), Australian Dollar (FXA), Singapore Dollar (FXSG), and British Pound (FXB) 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 are set to outpace US bonds:

and Canadian stocks likewise:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,455.23. This is -0.86% lower than last week’s price (2,476.55), and 0.57% higher than last month’s price (2,441.32), and 0.96% higher than the price three months ago (2,431.77), and 3.48% higher than the price six months ago (2,372.60), and 15.39% higher than the price one year ago (2,127.81).The average P/E ratio of the SP100 (equal weighted) is 25.09. 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):

  • Gilead Sciences, Inc. (GILD)
  • Boeing Company (the) (BA)
  • Biogen Inc. (BIIB)
  • Paypal Holdings, Inc. (PYPL)
  • Celgene Corporation (CELG)
  • Caterpillar, Inc. (CAT)
  • Apple Inc. (AAPL)
  • Oracle Corporation (ORCL)
  • Facebook, Inc. (FB)
  • Unitedhealth Group Incorporated (UNH)
  • Abbvie Inc. (ABBV)
  • Mastercard Incorporated (MA)
  • Abbott Laboratories (ABT)
  • Visa Inc. (V)
  • General Motors Company (GM)

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 15,038.31. This is -1.01% lower than last week’s price (15,191.60), and 0.03% higher than last month’s price (15,033.40), and -2.81% lower than the price three months ago (15,473.20), and -3.02% lower than the price six months ago (15,506.70), and 3.43% higher than the price one year ago (14,540.00).The average P/E ratio of the TSX60 (equal weighted) is 21.67. 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 4.61% (before dividends).

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

  • First Quantum Minerals Ltd (FM.to)
  • Teck Resources Limited Cl B (TECK-B.to)

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

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

Other Assets

Base Metals (ZMT.to), US Stocks (SPY), Global Stocks (XIN.to), Silver (HUZ.to), Real Estate (XRE.to), Oil (HUC.to), Canadian Stocks (ZCN.to), Natural Gas (HUN.to), are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
The oil price is rising, which increases manufacturing input costs and energy costs and may slow economic expansion.

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%) Canadian stocks
  • One unit (20%) US stocks
  • 2 units (40%) cash
Market Outlook, September 5, 2017

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