Market Outlook Oct 29, 2010

Interest rates have risen over the past week, as would be expected in an environment of rising interest rates. Bond prices, therefore, have fallen. This is normal as stock prices are rising. Bond prices are high and bond yields can’t go much lower, leading me to believe that bonds cannot offer a reasonable return over the next couple years. The reason for strong bond prices and weak stock prices seems to be that investors are wary of risk. This makes sense, given the large and sudden market crash two years ago. That would also explain the persistent talk of a double-dip recession. That may be a possibility, but it’s more likely that investors use that worry as an excuse not to re-enter the dangerous stock market. When risk is embraced again, stocks will fly while bonds languish and it will be time to take some profits and become defensive within the investment portfolio. At the present time, however, there appears to be little likelihood of a bear market.

There is some worry in the market which translated to a negative return last Thursday. However, Friday’s gains surpassed Thursday’s losses. The momentum of the stock market is higher than it has been since April 2010, which was just before the market reached it’s recovery peak. Stocks corrected during the past summer, but seem to be taking off again. Earnings reports are exceeding expectation, which increases the fair value of stocks.

GDP growth has come in higher, at an annualised 4.1%. This is quite impressive, and better than the 2% economists (who are always wrong, but always have a good excuses) expect for the next 12 months. Further, the period of November to May is generally the strongest performance for the stock markets. I am fully invested, positioned for growth.