July 17, 2010 Outlook

The stock market, last week, played out on a small scale what has been happening all year. Prices went up and prices went down, but the week ended essentially where it started. It’s summer and many people in finance, including traders, take holidays. We expect trading to be lighter with very little direction.

Stocks and bonds both seem equally unappealing from a short-term perspective. Over the medium to long term, stocks will probably continue to recover and grow at a quicker pace than bond rates, which continue to remain low. From the perspective of earnings, the stock market seems to be fairly valued to slightly overvalued. In order to justify the current value, earnings would need to grow almost 30% over the next 12 months. Given the pace of the economic recovery in Canada, this is possible. Keep in mind that the recovery seems more elusive in the States, and earning season has begun. We should soon have a good idea of the outlook for some of the world’s largest companies.

Short term rates have moved up even further, from 1.49% to 1.71%, continuing the trend from last week. This implies improved economic stability, which should translate to a stronger stock market. The probability of a recession remains remote.