Looking back, 2017 was a positive year for stocks. The Canadian stock market rose 6.3%, but it wasn’t consistent. It was basically flat for the first five months, then fell in June (typical), then was flat until mid-September when it started to rise. Canadian bonds were volatile, but basically flat for the year, besides the interest income. 2018 looks to be off to a positive start, where stocks have positive momentum and look prepared to outperform bonds and cash, at least over the next couple months. US stocks look the most attractive, followed by global stocks and Canada looking tepid.

Interest Rates

The 3 month T-bill rate is 0.94%, the 1 year T-bill rate is 1.22%, the 3 year government bond yield is 1.73%, the 10 year government bond yield is 2.04% and the long government bond yield is 2.26%. 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 1.69%. This is within the Canadian central bank’s target band of 1% to 3%.

Credit Environment

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

Currency

The Chinese Renminbi (FXCH), Euro (FXE), British Pound (FXB), Singapore Dollar (FXSG), Canadian Dollar (FXC), Swedish Krona (FXS), 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 vs. US stocks:

Canadian bonds vs. Canadian stocks:

Global Markets

I have no information for this right now.

US Stocks

This is also missing.

Canadian Stocks

I’m very close to firing my robot for incompetence.

Other Assets

Base metals (ZMT), crude oil (HUC), US stocks (XSP), real estate (XRE), Canadian stocks (ZCN), international stocks (VDU), global stocks (XIN), and silver (HUZ) 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%) cash
Market Outlook, January 2, 2018

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