Market Outlook July 25, 2011

Interest rates are little changed. Inflation was reported at 3.1%, quite a bit lower than the prior reading of 3.7%. On top of that, the Bank of Canada left their overnight rate unchanged. Because of these levels, the outlook for a bear market has dropped somewhat, but is still higher than it was last year. It is still not at the point where I expect a bear market to begin soon, but it indicates that we are further along the business cycle than previously.

Friday was the only strongly positive day in the stock markets last week, and it had a marked impact on the returns for the week. Stocks are regaining some momentum, but they are still not more attractive than bonds. Out of the assets that I track, gold (IGT) is still the preferred holding. Interestingly, small caps are showing improved momentum.

All those signs point to an improving attitude toward owning equities. It’s still tentative, but the fair market value is improving and investors seem to be less pessimistic. That makes some sense, as corporate earnings are reported and some of them are very positive. It’s hard to tell if this means the economy is coming back on track, as certain developed nations struggle with massive debt loads. At the same time, this is the summer season, where there is less trading and I expect that direction could change more quickly. I don’t expect any serious portents in the market until September.