It’s nice to see oil prices a little higher. Stocks still look more attractive than bonds. It looks like we came through the scary months of September and October without a correction.

Interest Rates

The 3 month T-bill rate is 0.84%, the 1 year T-bill rate is 1.13%, the 3 year government bond yield is 1.51%, the 10 year government bond yield is 2.03% and the long government bond yield is 2.38%. 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 1.63%. 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 2.46%. For small caps, it currently appears to be 2.15%.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher.

Currency

The US dollar currently appears to be the strongest currency.
The Canadian dollar has been losing value 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), Malaysia (EWM), Peru (EPU), Taiwan (EWT), Singapore (EWS), Italy (EWI), Russia (ERUS), China (MCHI), South Korea (EWY), Chile (ECH), United Kingdom (EWU), India (INDA), Thailand (THD), Austria (EWO), France (EWQ), USA S&P 500 (IVV), Germany (EWG), Poland (EPOL), Brazil (EWZ), Norway (ENOR), Netherlands (EWN), Ireland (EIRL), UAE (UAE), Denmark (EDEN), Hong Kong (EWH), Sweden (EWD), Belgium (EWK), Canada (EWC), Australia (EWA), South Africa (EZA), Finland (EFNL) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,581.07. This is 0.23% higher than last week’s price (2,575.21), and 2.45% higher than last month’s price (2,519.36), and 4.41% higher than the price three months ago (2,472.10), and 8.26% higher than the price six months ago (2,384.20), and 21.38% higher than the price one year ago (2,126.41).The average P/E ratio of the SP100 (equal weighted) is 26.09. 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 3.83% (before dividends).

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

  • Dow Chemical Company (the) (DOW)
  • Paypal Holdings, Inc. (PYPL)
  • Intel Corporation (INTC)
  • Caterpillar, Inc. (CAT)
  • General Motors Company (GM)
  • Abbvie Inc. (ABBV)
  • Amazon.com, Inc. (AMZN)
  • 3m Company (MMM)
  • Bank Of America Corporation (BAC)
  • Texas Instruments Incorporated (TXN)
  • Wal-mart Stores, Inc. (WMT)
  • Unitedhealth Group Incorporated (UNH)
  • Mastercard Incorporated (MA)
  • Blackrock, Inc. (BLK)
  • American Express Company (AXP)
  • Jp Morgan Chase & Co. (JPM)
  • Capital One Financial Corporati (COF)
  • Morgan Stanley (MS)
  • Emerson Electric Company (EMR)
  • Boeing Company (the) (BA)
  • Abbott Laboratories (ABT)
  • Johnson & Johnson (JNJ)
  • Danaher Corporation (DHR)
  • Apple Inc. (AAPL)
  • Accenture Plc Class A Ordinary (ACN)
  • Mcdonald’s Corporation (MCD)
  • Alphabet Inc. (GOOG)
  • Visa Inc. (V)
  • Alphabet Inc. (GOOGL)
  • Nextera Energy, Inc. (NEE)
  • Exelon Corporation (EXC)
  • Citigroup, Inc. (C)
  • Fedex Corporation (FDX)

Canadian Stocks

Yesterday’s closing price was 15,953.50. This is 0.61% higher than last week’s price (15,857.20), and 2.04% higher than last month’s price (15,634.90), and 5.45% higher than the price three months ago (15,128.70), and 2.36% higher than the price six months ago (15,586.10), and 7.90% higher than the price one year ago (14,785.30).The average P/E ratio of the TSX60 (equal weighted) is 22.27. 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 4.49% (before dividends).

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

  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Dollarama Inc (DOL.to)
  • Magna International Inc (MG.to)
  • Constellation Software Inc. (CSU.to)
  • Saputo Inc. (SAP.to)
  • National Bank Of Canada (NA.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Restaurant Brands International (QSR.to)
  • Toronto-dominion Bank (TD.to)
  • Royal Bank Of Canada (RY.to)
  • Franco-nevada Corporation (FNV.to)
  • Husky Energy Inc. (HSE.to)

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

  • Crescent Point Energy Corp. (CPG.to)
  • Power Corporation Of Canada, Sv (POW.to)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

Base Metals (ZMT.to), International Stocks (VDU.to), Global Stocks (XIN.to), US Stocks (SPY), Canadian Stocks (ZCN.to), Crude Oil (HUC.to), Canadian Bonds (XBB.to), and Global Infrastructure Index (ZGI.to) are performing better than cash.
The gold price is neutral.
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
  • One unit (20%) international stocks
  • 1 unit (20%) bonds
Market Outlook, October 30, 2017

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