Market Outlook April 11, 2011

The posted 5 year mortgage rate jumped from 5.34% to 5.69%. All else being equal, this increases the total cost of houses to purchases and makes qualifying more difficult, so that the market price of houses is likely to fall. Otherwise, interest rates have risen only slightly. With various geopolitical troubles (Japan seems to have no luck!) and Portugal facing a bailout, the economy hardly seems to be overheating. Chances of a market top followed by a recession seem slim. We recently experienced a mild and short-lived correction, so the market is likely to either move sideways or up over the next couple weeks.

Momentum is strongly in favour of stocks. With bond rates rising and values falling, there seems to be little opportunity to profit. Stocks keep moving up, which makes it difficult to want to buy in, but it’s where the majority of money appears to be going. As earnings have been reported, it has been good news, and even though the P/E ratio of the market is 20, that’s only an average. Still, on average, the upper end of “fair value” keeps moving up, and is about the same as the current value. It makes sense to take care with stock selection.