Market Outlook May 9, 2011

Interest rates have fallen, which surprises me a little. There’s no telling why it may be, with all of the geopolitical events recently. Bond values rose while other hedges such as precious metals fell. The real question is: is the economy growing at a healthy rate? With all the thought and effort economists put into answering this question, there’s no single, simple answer. The economy is not as strong as it was four years ago, so I’m less concerned about an upcoming bear market. Sure, we could slip back into recession, but it seems to me that we’re still ramping up. Jobs seem to be more plentiful and money appears to be circulating a little more quickly. Perhaps that why inflation is higher, but there are also the pesky commodity prices that continue rising. I’m feeling it at the gas pump.

Stock prices are lower. They have been trending sideways since the beginning of February, but they have now closed the week at the low end of the range. This coming week will be interesting, watching to see if the market level rebounds or drops lower. The old saying, “sell in May and go away” implies that summer is usually uninteresting at best, and may turn negative. Actually, they haven’t had much momentum since February, even compared to bonds, which have been doing fairly well since January. Last summer, bonds outpaced stocks for a short period. While I didn’t move into bonds, I wouldn’t be surprised to see the same indicator this coming summer. Last summer, the VIX moved over 45, while it’s currently at 18. With low volatility, it’s unlikely that we’re due for a crash.

The TSX valuation has improved. The P/E is back under 20 and the current yield is back over 2.4%. This generally means that earnings are coming in strong. It moves the range of fair value a little higher, and the current value again falls within that range.