September 18, 2010 Market Outlook

Oops! Last week I realised too late that I hadn’t written a market update. There wasn’t much to say besides: It’s really nice to see strong performance from the stock market again.

Short-term interest rates jumped when the Bank of Canada raised their prime lending rate. Long-term rates and real return bonds, however, remained unchanged. Interest rates are telling the same story as the stock market. The economy looks to be as strong now as it appeared in May and June of this year. Having said that, it appears very unlikely that we’ll see a bear market anytime soon, especially given that the market is still in recovery mode. There’s starting to be anecdotal evidence that the economy, at least here in Western Canada, is really picking up. I feel the stock market is (still) likely to end the year higher than at the beginning of the year.

Over the last two weeks, the stock market has not advanced. Still, it has maintained the relatively high level achieved just prior to that. Market momentum is clearly in favour of stocks, over bonds. Comparing the stock market to corporate earnings, it appear to be overvalued. At a P/E of almost 21, the market appears expensive. That is, unless earnings continue to grow rapidly. The market is discounting earnings growth of 36% over the next 12 months. It seems to have trouble holding above 12,200, so it’ll be interesting to watch the next six weeks. After that, if history is a guide, the last two months of the year should present increasing prices.