Market Outlook May 2, 2011

Are you voting? Today is election day, all across Canada. I, personally, will be spoiling my ballot. I wasn’t going to vote, but my six year old asked me about the election. I want to set the proper example, even if I don’t feel I can support any of the parties who are offering to represent us (in the loosest sense of the term). So I’ll take him to a polling station and allow him to mark whatever he likes on my ballot. It won’t matter much, since any riding in Calgary is pretty much a forgone conclusion.

In matters economic, the outcome of the election isn’t very likely to affect the economy much. The Bank of Canada is an arm’s length entity, meaning that monetary policy is divorced from and independent of fiscal policy. If interest rates are likely to rise sometime in the next year, it doesn’t depend at all on which party is elected. Interest rates remain low, but are not rising yet. GDP came in lower than expected at 2.9%, which implies that the economy is not overheating and doesn’t require the braking influence of higher interest rates.

At the same time, about 3 in 4 companies reported higher than expected earnings. Earnings season restarts again almost right away, so it will be interesting to see if this trend of strong earnings is able to remain consistent. Stocks continue to outpace bonds, but that’s no surprise. The market hasn’t really made much progress lately, so the “momentum” it displays is, in some ways, a holdover from prior months. Stocks don’t really appear overpriced, but they are pricing in an expectation of strong growth over the coming year.

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