Stocks vs. Bonds Valuations


The major themes over the next few months impacting the markets will be China data and yuan devaluation, forward corporate earnings guidance from the bellwether, the US, and the UK vote to withdraw from the European Union.  Of the three the Brexit vote will have the most poignant impact as it has become a market focal point. Anytime the market sharpens its gaze, even if the coverage has blown it out of proportion, volatility is sure to follow. That said, though China and the earnings picture are more of a slow moving ship than a two-seater speed boat, the stealth devaluation of the Yuan is a bigger story.

Technically, there is room for pro-cyclical equities – e.g. energy, financials, industrials, consumer discretionary – to run a wee bit more in the short term, possibly into mid July depending on how the UK vote goes.   These groups are showing up in the weekly data (shorter term) on our Relative Strength Ranking tables below

The ratio of the S&P to the 10 year US treasury is stuck in a band where stocks vs. bonds are near the expensive side. This level capped the run in the spring and in late summer last year, and as well back in 2007.  Too, since the February recent bottom in equity markets bond yields have not backed up as would be expected nor have defensives lost a decent bid.


With the ever-changing minute-to-minute investment narrative these markets require client portfolios have a high level of “convexity”.   Portfolio convexity means that assets are allocated across defensive and pro-growth securities whatever class the securities come from.  This insulates assets from both the long and short term consequences of these opposing forces.  Its diversification by risk, not asset class.

Consumer Staples
Metals & Mining
Consumer Discretionary
Information Technology

This approach reduces the impact and guessing game surrounding monetary policy or GAP to non-GAAP earnings while being mindful of asset protection and absolute client asset growth expectations. Portfolio convexity for CastleMoore portfolios is not balanced.  At present, it is more heavily weighted to one side over the other.  This imbalanced situation actually creates portfolio “balance”

We are treating the rise in pro-growth securities as a short term event until it’s borne out that there’s more to the moves, requiring us to adjust this balance.

Weekly Momentum Rankings


In the Asset Class rankings there is what some investors would see as a conflict when both commodities and fixed income are strong.  While bond prices reflect investor sentiment on future economic conditions (+/- inflation expectations), commodities because most are priced in USD reflect currency relationships.


What we saw in the Asset Class rankings also is showing up in the Canadian sector rankings.  The top spots are pro-cyclical, resource related sectors, and just behind them strong defensive areas such as telecom, utilities and REITs.


The US market is less resource-based, but the real trend of “convexity” continues.  What does stand out this week is the large drop of US financials from 5th to 13th post-FOMC. The Fed funds futures all but slammed the door shut for any meaningful rate hike odds until December which now stands at 48%. The day before the meeting they stood at 77% chance of a rate hike.


The trend of resource-based markets heating up recently is reflected in our country rankings, and below within the TSX index itself we see this dichotomy too.


Chief Portfolio Manager