Market Outlook: February 21, 2011

This post is a day late, due to the Family Day holiday. Markets were closed in Canada and the US (Presidents Day). I spent some time with my in-laws. I had set up Google Voice for my father-in-law, who phones his mother long distance each day. It now costs him nothing, and he figures he’s saved $20, at least. “I’m going to sell all my telecom stocks,” he jokingly said. I guess they still have their wireless business and Internet service, but the business has definitely shifted.

The news this week is that inflation unexpectedly fell. It’s not much lower, but inflation is expected to rise as the economy recovers. There were two consequences: first, interest rates seem less likely to rise, given that inflation is not a problem; second, the value of the Canadian dollar weakened due to the less optimistic outlook for our economy. Neither of these things are real problems, since borrowings have been reported to be at an all-time high, and increased interest rates will hurt borrowers. Further, the exchange rate for the Canadian dollar is very strong and not helping exporters.

Interest rates remained stable, with the exception of short bonds, which rose. The yield curve has flattened somewhat, but with rates this low and the slope still positive (3.81% long vs. 2.26% short = 1.55% positive difference), this does not indicate a market top. The likelihood of a bear market remains remote.

The stock market just seems to keep going up. Momentum now is better than it has been at any time since last spring. Even if stocks turned down now, they’re 17.5% higher than 10 months ago, and it would take a while before there appeared to be in danger of crashing. This doesn’t preclude a slowdown or correction. But I looked back on the history of the TSX over 2003-2007. Even though there are periods where the market moved sideways or experienced minor corrections, it basically rose over 130% in a period of under four years without a crash. I guess that could happen again, even if it doesn’t seem very realistic. The market seems to be edging into “over-valued” territory, so it will be particularly interesting to see the earnings reports of the banks later this week.