Market Outlook November 20, 2010

Interest rates have risen by the barest of margins, meaning that bond values have fallen slightly. Until interest rates move much higher, in response to strength in the economy, the likelihood of a bear market remains slim. We will continue to experience market corrections, moves lower by less than 10%, such as the 3.5% correction we experienced between November 9 and November 16. However, by the end of the week, the stock market had recovered much of that ground.

The stock market continues to show much better momentum than the bond market. Despite the volatility of the last week or two, stocks have been advancing while bonds fall back. When interest rates are low, any loss in value of bonds risks erasing gains or incurring losses. The stock market, on the other hand appears to be within the bounds of fair valuation, if a little optimistic. Given the fact that the economy continues to recover and problems continue to be dealt with as they arise, this seems reasonable.

GM completed, last week, one of the largest IPOs in history. Initially, the shares were to be priced at $26 to $29. Due to demand, the price was increased to $33. Given that the shares traded higher after issue, the price was probably reasonable. This reflects broad-based optimism in the performance of GM in specific and the economy in general. This is an example of perceptions reinforced by other perceptions.

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