Market Outlook November 5, 2010

Interest rates have remained virtually unchanged over the past week. The US government has announced more quantitative easing, meaning they’re putting more money into the system. The stock market has interpreted this as good news, as it is expected to help the economy recover. It isn’t seen as inflationary yet, or we would see interest rates rising. Although the economy is not yet strong, there is quite a bit of good news and positive earnings surprises. The chance of a bear market reappearing seems slim.

Bond values have fallen while stock prices are rising. Stocks look like a much better short-term hold than bonds, presently. The stock market has great momentum and seems to keep going up. Between good corporate earnings and supportive government policy, the strong stock market returns should continue over the next few months. The stock market is higher than it’s been in two years, since the market crash. It briefly reached 13,000 on Friday before drifting back down. Much of the losses due to the crash have been earned back, with the rest likely to come next year.

Fair value of the stock market has increased. Earnings are higher, bringing the P/E under 20. This may not seem particularly cheap, but recall that it is based on past earnings. If future earnings can be expected to be much higher, the forward P/E would appear less expensive. Still, the market is probably fairly valued, without being over- or under-valued at this time. If the choice is between cash, bonds and stocks, the best returns are likely to be produced by stocks over the coming year.

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