Market Outlook July 18, 2011

The stock market had another negative week, and bonds continue to have better momentum. Accordingly, a portfolio composed of stocks and bonds would do benefit from being weighted more heavily toward bonds than stocks. For an investor rotating between a larger number of assets, the shine has gone off real estate and gold (IGT) is once again the leader. I will be selling my real estate ETF and buying back the gold ETF early next week.

Earnings season has begun again. It appears that earnings were a little weak, given that the fair value of the stock market has dropped slightly. The market still appears to be pricing in expected earnings growth of about 30% over the next 12 months. That is possible, given that the economy is (supposed to be) climbing out of a recession, but there are many causes for concern. Over the past six weeks, company earnings seemed positive while other economic data seemed disappointing. This just underlines the general feeling of uncertainty.

The most recently reported inflation number was for the month of May. It was very high, at 3.7%, which would normally bode poorly for economic health. Recently, inflation expectations have also increased. However, bond rates fell over the past week, indicating that investors are moving to bonds for safety, not demanding higher yields. With central banks seeming to prefer to keep rates low, it seems unlikely that rates will rise much before next year. That should continue to be supportive of (leveraged) companies’ profits and share prices.