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National Bank Financial Markets expects an unemployment rate in the neighborhood of 9 per cent in the coming year and a 13 per cent decline in Toronto house prices. However, investors are viewing the impact of COVID-19 as causing a temporary economic slowdown. Long-term challenges of escalating U.S.-China conflict and supply chain shortening leading to reduced world trade have also been factored in to the rising stock prices.
RBC Capital Markets’ Lori Calvasina recently noted the price-to-earnings multiples for the S&P 500 are 24 and 20 times respectively for 2020 and 2021. While high by historical standards, the equivalent earnings yield of 4.2 and 5 per cent respectively appear attractive compared to the 0.67 per cent yield on U.S. 10-year Treasury bonds.
We said last month that gold stocks were attractive. The current low level of real interest rates and significant free cash flow generation continue to make the sector attractive.
Tina Normann, principal and technical researcher at Eight Capital, noted that the rise in German bond yields is increasing the yield spread versus U.S. bonds. This is expected to weaken the U.S. dollar and “confirms the shift in money flow favouring cyclicals and gold stocks.” We expect equity prices to continue to rise over the coming year.Sign up for BNN Bloomberg's new weekly newsletter, Home Economics, which aims to help Canadians navigate their personal finances in the age of social distancing and beyond. Have it delivered to your inbox every Friday by subscribing at https://www.bnnbloomberg.ca/subscribe