Market Outlook March 28, 2011

Interest rates have remained virtually unchanged this week. The exception is the 5 year conventional mortgage rate, which dropped slightly (from 5.44% to 5.34%) for the first time in quite a few weeks. Despite the geopolitical turmoil and the brief stock market sell off from a week or two ago, financial markets appear fairly stable. Earnings reports continue and it has been somewhat mixed. While many companies are more profitable than at any time over the last two years, some continue to struggle. The nervousness of investors and analysts implies to me that we’re not at the stage of euphoria (over-optimism?) that characterizes a pre-recession market top. That’s not to say we might not experience the summer doldrums again this year.

Over the last several months, bonds have provided movement, but no clear direction. That is to say, investors in bonds have made no progress. Stocks, on the other hand, provided very strong returns until a couple months ago. Still, stocks have better momentum than bonds, and still appear to provide the best investment opportunity. Stocks are not undervalued relative to past earnings, but bonds don’t seem likely to provide any future appreciation. And investor might take some consolation in the 3.6% yield provided by bonds, which is higher than the 2.3% dividend yield from stocks. However, if bond yields rise, an investor would lose money on the bond’s market value. This seems the most likely scenario for the future.