Given that copper is more reflective of the actual physical market of supply and demand, we are more inclined to believe the signal about growth from the recent fall in copper prices.  Stocks are being held up by low current level of interest rates and the belief (hope) that they will eventually lead to stronger global economic growth.

Sharp reductions in interest rates around the world have also been putting severe downward pressure on almost all currencies, except the U.S. dollar.  The prospect of higher interest rates in the U.S. (or at least no further reductions in interest rates) have caused capital to flow to the U.S. at the expense of all the other currencies.  While 1.8% might not sound like a good rate of return for 10-year U.S. government bonds (being close to the lowest rate in history), it still compares very favourably to the 0.4% rate on German Bunds, the 0.2% rate on Japan JGBs and even the 1.4% rate on Government of Canada 10-year bonds.  So it should be no surprise that our currency has suffered relative to the U.S. dollar over the past few months, dropping to its lowest value since 2008.  Falling oil prices have also weighed down the Canadian dollar as energy is a bigger component of our economy than it is in the U.S.  In fact there is a very tight relationship between the US/Can$ exchange rate and the price of crude oil.  So, unless oil prices are about to recover or the Bank of Canada is going to suddenly reverse the new policy unveiled last week, we can expect the Canadian dollar to continue to erode against our southern neighbor.

Despite many stock markets moving back to new highs recently, pessimists can find plenty of reasons to be worried.  Many central banks, for instance, appear to be engaged in a game of competitive devaluation. The Canadian dollar, the Japanese yen and the Euro have all plummeted against the U.S. dollar and more losses seem likely, given the apparent willingness of many countries to weaken their currencies as a way to boost exports. This doesn’t speak well for the strength of the global economy.  For now however, investors seem mostly oblivious to the risk in stocks.  They move higher on the basis of the long-term comparison to interest rate levels.

The chart below shows the difference between the ‘earnings yield on stocks’ and the 10-year government bond yield.  The higher the value, the more that stocks are undervalued relative to bonds.  While the value has come down in the last 2 years as stocks have rallied, it remains above the long-term average, suggesting that stocks are still a buy on this analysis.  However, it is only because of the excessively low level of global interest rates, which are being supported by increased levels of debt. Low Interest Rates Help Stocks

It may not feel like it, but stocks are actually more expensive than they’ve been since 2005. Still, most investors say that shouldn’t be a huge cause for concern.  The S&P 500’s price-to-earnings ratio, which compares the price of the S&P to analyst projections of what S&P companies will earn over the next 12 months, has risen to 16.6, according to FactSet. Not only is that above historical norms, but it is the highest that metric has been since March of 2005.What’s unusual is that stocks have gotten more expensive in terms of valuation, even as the market itself has been relatively stagnant.  That’s because earnings estimates have fallen dramatically of late. In fact, from the end of the year until now, analysts have decreased their estimate for what S&P 500 companies will earn over the next year by nearly $3, or 2.2 percent. So even as the price/earnings (P/E) equation’s numerator has stagnated, earnings have fallen.  Unsurprisingly, much of the decline in earnings expectations comes from energy sector analysts, who are still reeling over oil’s 50 percent plunge from its 2014 highs. From the end of the year, earnings per share estimates for the energy sector have swooned 27 percent.

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