Market Outlook November 27, 2010

Interest rates have risen slightly, meaning that bond values have fallen again. The 5-year mortgage rate has jumped from 5.19% to 5.44%, higher than it has been in a couple months. StatsCan inflation has also jumped from 1.9% to 2.4%. The probability of encountering another bear market, while still low, has risen lately. In the mid-summer when interest rates were slightly lower and the stock market was lower, a bear market was highly unlikely. As the stock market, inflation and interest rates rise, the likelihood increases. At the same time, stocks are not at their 2010 high and are far below their 2008 high. Inflation is also within the target band of the Bank of Canada.

Stocks and bonds both fell this week. That is part of the reason that diversifying between asset classes doesn’t always produce smoother returns. The stock market still has much better momentum than the bond market. It looks likely, however, that stocks may present a slower rate of advance over the month of December, given the end of the year profit-taking, capital loss harvesting, window-dressing and holidays. Maybe there will be an opportunity to buy some bargains, but likely not comparable to what was available during the summer.

The range of fair value for the stock market appears to be between 8,000 and 13,500. The current value is toward the high end of this range. The range has been moving upward as earnings reports come in showing that companies are more profitable than a year ago. While we will continue to experience fluctuations, I expect the market to be higher a year from now.

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