In an unusual occurrence, stocks and bonds both lost value over the past week. The stock market average dropped by around 1%, while at the same time interest rates rose and bond values fell. With interest rates going higher and the most recent inflation numbers very low (0.7%), it is apparent that policymakers are not using rates to slow an economy that is overheating. Quite the opposite, as it looks like the economy continues to be very slow.
Even though they’ve lost some of their advantage, the momentum of stocks continues to outpace bonds. While stocks have the advantage, Chinese stocks (FXI) appear to be particularly well positioned (in USD$) and emerging market stocks (XEM, in CDN$).
Stocks didn’t have a very good week. Monday and Friday were positive, but couldn’t overcome the steep slide on Tuesday. Looking a little further back, stocks had three really strong weeks in a row, but have been treading water over the ensuing six weeks. Still, they have better momentum than bonds and still appear to provide better opportunity for continued growth.
US small caps (IWM) have the best advantage, and Chinese stocks (FXI) are a close second. I, however, continue to own Manulife (MFC), which has better momentum than a broad index.
Bonds rose in price somewhat over the past week. Medium term interest rates didn’t move, but long-term and short-term rates rose slightly. That should have pushed bond values down, but it’s possible that increased demand kept the price up. It seems a little strange, though, given that the stock market has started to rise and the economic outlook isn’t particularly strong. To be fair, the economic environment is supportive of expansion, with low interest rates and low inflation. That’s looking backward at recent data, while the stock market is forward-looking. It seems more and more likely that the stock market will continue to rise throughout the next couple months.
A balanced portfolio would benefit, given all appearances, from an overweighting in stocks. Bonds aren’t currently dragging it back, but they’re not helping as much as stocks. Bonds have risen 0.70% over the past 2.5 months, in addition to producing 2.99% (annual) interest. Stocks, on the other hand, have risen 6.67% over the past 2.5 months.
The US market continues to benefit from the strongest tailwind. US large caps (SPY) have the greatest momentum, followed closely by US small caps (IWM). Fortunately for those of us investing in CDN$, Canadian large caps (XIU) aren’t too far behind. Personally, however, I will continue to own MFC, which has better momentum than any of the market ETFs.
The market is open today. That will not prevent me from observing a moment of silence at 11:00am.
Stocks put in a positive performance over the past week. At the same time, bonds fell due to rising interest rates. Looking ahead, a portfolio balanced between stocks, bonds and cash would benefit from being overweight stocks, and holding as little cash as possible, as always.
Given that interest rates have begun to rise and that companies are beginning to report their quarterly results, I expect to experience volatility in the market. Investors will adjust their outlook and their valuation estimates to match the financial results, and stock prices will move accordingly. It appears, so far, that more companies have been successful than unsuccessful. The economic outlook seems to be relatively positive.
Comparing the asset classes that I track, US large-cap stocks (SPY) continue to have the best momentum, followed closely by Canadian large-caps (XIU). I will continue to own a single large-cap stock, rather than an ETF, because the momentum is even better. I’ll write about my trade on Wednesday.
After two weeks of extremely strong returns for stocks, last week felt disappointing. But it can’t go up forever, and the market didn’t really slide back much. It was more like taking a breather. The result is very little change to the outlook. Stocks continue to outpace bonds, and US large-cap stocks (SPY) and Canadian large-cap stocks (XIU) appear to be the best positioned for growth in the near future.
Interest rates have fallen slightly. They really don’t look like they could go lower, but I’ve learned by now to “never say never.” Interest rates and inflation rates don’t reflect great strength in the economy, but the stock market is actually a better advance indicator of the economic cycle. Having said that, earning reports are starting to come in, and for the next couple weeks, past results will probably have the greatest effect on the outlook for corporate profits.
Stocks had a very profitable week last week. Bonds also rose in value, since interest rates dropped. Stocks are outpacing bonds, and show far better momentum. A portfolio that is balanced between stocks and bonds should definitely be overweight stocks for the near future. And anyone who has been out of stocks should seriously consider getting back in.
Between various stock markets, US small caps (IWM) still lead the way. US large caps are quickly catching up and, in Canada, emerging markets (XEM) have the best outlook, with the TSX 60 (XIU) not far behind.
A very short post today.
Stocks over bonds (again).
IWM, EWZ, EWH, XEM, XIN…
I still don’t own these, because MG is still doing better. But I wish I owned VRX.
Bond yields are a little lower, mortgage rates are a little higher.
Happy Canadian Thanksgiving. (The TSX is closed today in observance of the holiday.) We have a lot to be thankful for, specifically the appearance that we’ll get through 2013 without a painful market correction. My hope for 2014 is to experience some sustained market growth, but for now I’m content to be halfway through October without seeing stock values seriously fall.
Over the past week, interest rates rose, pushing bond values down. As a result, stocks handily outperformed bonds. As a result, stocks have much better momentum than bonds and it appears that the fast money is moving into stocks.
Between the various asset classes in my model, Brazilian stocks (EWZ) show the greatest momentum, with Hong Kong stocks (EWH) nearly as strong and US small caps (IWM) tied for second place. Not surprisingly then, the emerging markets ETF (XEM) shows the best momentum of ETFs in CDN$. What surprises me is the gap between US small caps and US large caps (SPY), the latter showing almost no momentum at all.
It hasn’t been easy to feel excited about investing in stocks lately. Over the past week, stocks fell 0.5%. At the same time, stocks continue to show more momentum than bonds, which also fell over the past week. It is interesting to note that bonds have risen 1.17% over the past month, while stocks are down 0.67%. But that really just reflects the fact that stocks are more volatile. Over a period of three months, stocks have outperformed bonds +5.13% to -0.60%. The relationship of outperformance holds over periods of six months, one year and five years.
Looking at my asset rotation model, I see that US small caps (IWM) are clearly in favour, not too far ahead of Brazil stocks (EWZ), Hong Kong stocks (EWH), and Chinese stocks (FXI). Those are followed, unsurprisingly, by Emerging Markets (XEM, in CDN$). Part of the reason I make this point is that US large caps follow further behind. The momentum in US stocks is not widely generalized. As an example, I have owned Walgreen (WAG) over the past week, and been rewarded for doing so. I will continue to own it over the coming week.
For my Canadian dollar investment accounts, I will continue to own Magna (MG), since it has a better outlook than any of the CDN$ ETFs. I just wish I owned VRX instead. I simply don’t have high enough confidence that VRX will outperform MG to incur the transaction costs to switch.
The TSX market average was basically flat (minutely positive) over the past week. Bond prices jumped up by almost 1%, however, somewhat reducing the advantage that stocks appear to enjoy. Bond yields fell, which resulted in the bond rally, but which bodes ill for anyone looking to invest in bonds. As such, a portfolio that is balanced between stocks and bonds should remain overweight stocks.
Among the asset classes in my model, Chinese stocks (FXI) continue to be well positioned for outperformance. They are essentially tied with American small-caps (IWM) and followed closely by Brazilian (EWZ), Hong Kong stocks (EWH) and European stocks (XIN). Basically, Canadian stocks are not the place to be right now and emerging markets are doing well. I expect the trend to continue over the next couple weeks. (I myself will continue to own MG, which has even better momentum and has served me well.)
September has not be a negative month for stocks, despite history showing that September and October are typically the worst months in the market. Who knows what October will bring, but the market does not appear to be overheated. And November often brings a “Santa rally”, which typically begins the most profitable half of the year for owners of stocks.