Market Outlook December 27, 2010

First, market closures. The TSX and Venture markets were closed on Friday Dec. 24th beginning at 1:00pm EST. The markets will not be open Monday Dec 27th (in lieu of Christmas) or Tuesday Dec 28th (in lieu of Boxing Day). That means the next opportunity to buy or sell stocks will be for settlement in the new year. The market will be open Dec 29th, 30th and 31st (regular hours). The markets will again be closed on Jan 3, 2011 (in lieu of New Year’s Day). This means that a trade filled on Dec. 29th (the next trading day) will settle on January 4th, 2011. Because of the relatively few trading days over the next two weeks, the next Stock Market Outlook will be presented in two weeks from today.

Bond yields have fallen again. What surprises me more, is that bond values have fallen at the same time. There is little expectations that interest rates will rise, and inflation just came in lower than the month prior, right on the Bank of Canada’s target of 2.0%. The likelihood of a bear market is lower, based on low inflation and interest rates. The economy definitely does not appear to be over-heating. Market momentum continues to favour stocks quite strongly. Where November through April generally experience strong stock market performance, the pattern has held thus far this year. It appears that the first months of 2011 may bring more strong performance.

With a P/E ratio of 19.67 for the market as a whole, it’s easy to believe that stocks appear fully- to slightly over-valued. Based on current earnings, stocks are not cheap. The question becomes what the next year will bring. If the economy continues to recover and earnings grow, stocks may be a bargain at present prices. Indeed, the market has not recovered the pre-crash level of 15,000. (It’s a little more than 10% below that level.) At the same time, the current market level is higher than any time in the last two years. I am concerned that prices may not be warranted unless earnings continue to beat expectations (on average). However, stocks don’t appear to be grossly overvalued and bond prices are not rising. Despite my concerns, I’m buying stocks.