Stock market superstition says: As goes January, so goes the year. Some people believe the first five days of January are an indicator of how the markets will fare over the year, and thus far, January has gone quite well. It’s only been four days, since the first day was a holiday, but the Canadian stock market is up 0.9%. The bond market isn’t really looking up. And US stocks still show much better momentum than Canadian stocks, even though investors are starting to feel that the US market is overextended. They’re close to the longest bull market in recent history.
The 3 month T-bill rate is 0.93%, the 1 year T-bill rate is 1.21%, the 3 year government bond yield is 1.74%, the 10 year government bond yield is 2.08% and the long government bond yield is 2.32%. 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 1.74%. This is within the Canadian central bank’s target band of 1% to 3%.
When the dials point left, the credit environment is cautious and risks are priced higher.
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: Stocks win!
Canadian bonds vs. Canadian stocks: Stocks… are looking up.
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
- 3 units (60%) cash