July 31, 2010 Market Outlook

This week’s stock market outlook appears today, due to the Heritage Day long weekend. My unscientific prediction is that the TSX will rise today. It’s not hard to guess, given that the S&P 500 was up over 2%, while the TSX was closed. The TSX seems to takes its cues from the S&P 500 as regards outlook.

Further, bond rates have risen, for both short and long bonds. Increasing interest rates tend to coincide with a rising stock market and improving expectations for the economy. The stock market ended last week about where it began, so we may see an upward push this week. Stocks again have better momentum than bonds, indicating that the summer pause may be over. Then again, it might be too early to become enamored of stocks.

The stock market appears slightly over-valued. This is based on earnings and the backward-looking P/E multiple. We are in the midst of earnings season, and if earnings this year come in 30% better than they were two years ago, the market would actually be undervalued. Because we are coming out of a severe recession, that may not be an unrealistic scenario. The market isn’t dirt cheap, but it is still well below the 2008 high over 15,000.

I am cautiously optimistic that many stocks will end 2010 at a higher price than they are trading at today. An investor with cash should focus on buying bargains.