Market Outlook July 11, 2011

The stock market had a positive week, but failed to outpace bonds. Once again, bonds have better momentum than stocks, indicating that a portfolio should be overweight bonds and underweight stocks. This is a reversal from last week. Looking at the wider array of assets available, real estate (XRE) continues to have the best momentum, and I continue to own my real estate ETF.

The probability of a bear market is somewhat elevated, at least compared to the couple of years since the market crash (2008). Inflation is running over 3%, which is too high for the Bank of Canada. On the other hand, much of this inflation seems to be coming from commodity prices: oil, metals and food, so it would be foolish for the Bank of Canada to raise rates on that basis if the overall economy isn’t strengthening. I’m uncertain that there’s much economic strength in the rest of Canada, but things are heating up in Alberta to the point that we’re once again facing labour shortages. That should be supportive of local real estate prices. At the same time, it may be the start of another boom and bust cycle.