Market Outlook: March 7, 2011

The news of the past week was the Bank of Canada choosing to keep interest rates unchanged. It wasn’t surprising, but the outlook seems to be that rates are unlikely to rise in the next year or so. Inflation expectation have fallen, but the exchange rate has moved against the Canadian dollar and oil prices are higher. These things cause a drag on the economy, and raising interest rates would have exacerbated the slowing influence. Because the economy is seen as weak, but strengthening, the fiscal policy continues to be supportive. I’d certainly rather invest in stocks than bonds at this point.

The stock market advanced more than 1.4% over the last week. It is interesting to note that the market average does not apply to all stocks. While Energy and Materials stocks did very well over that period, other stocks fared less well. The market advance was fairly focused and not widespread. It almost feels like early 2008 when the market average was being driven almost entirely by Potash and RIM. Having said that, there is no reason to believe that we might expect another market crash. In this case, the economy is still recovering from a recent recession, rather than topping out after a six-year run.

Earnings reports continue to bring good news. Not every company has performed as well as expected, but many have either met or exceeded expectation. At the same time, analysts’ expectations seem to have caught up with the reality, after spending four quarters (or more) being positively surprised. These positive results have translated into a higher fair value estimate for the stock market, causing it to appear closer to fair value and less over-valued. The market’s not as under-valued as it was a year or two ago, but there is probably still opportunity to profit over the next year or two for anyone choosing to invest at this point.