The Bank of Canada raised interest rates again, which continued to push the Canadian dollar higher. Canadian stocks are down 1.36% for the week, and bond prices also fell. The Canadian stock market is struggling, but that means it also looks cheaper to buy, for those who have been sitting on cash.
The 3 month T-bill rate is 0.83%, the 1 year T-bill rate is 1.14%, the 3 year government bond yield is 1.53%, the 10 year government bond yield is 1.94% and the long government bond yield is 2.33%. 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 1.60%. 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 2.72%. For small caps, it currently appears to be 2.21%.
When the dials point left, the credit environment is cautious and risks are priced higher.
Government bonds are falling, and so are corporate bonds.
Short term and long term bonds are both falling, at a similar rate.
High quality and high yield corporate bonds seem to be holding up okay.
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):
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 rising, which increases manufacturing input costs and energy costs and may slow economic expansion.
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