Market Outlook December 19, 2011

The good news is that the VIX continues to fall. It is now below 25 (a little), and hopefully it will continue to fall below 20. This would mean that the popular outlook is becoming more tempered and less expectant of surprises. That doesn’t mean the market will necessarily improve, but when investors have less uncertainty, they’re more likely to invest. As they do, increased demand tends to push up prices. This, in turn, feeds the perception that markets are a good investment, further feeding the “virtuous cycle.”

We’re not quite there yet, though. Last week was negative for stocks, while it was positive for bonds. Bonds continue to be favoured by the market, with super-low yields and high prices. Stock markets, on the other hand, continue to display negative momentum, and appear more and more undervalued. This week, the stock market appears almost 9% undervalued, while my fair value estimate has remained virtually unchanged.

I was pleasantly surprised this week by the relative performances of gold and real estate stocks. Since selling gold to buy real estate (XRE), I watched closely to see if it appeared to be the right decision. This last week, gold dropped over 5%, while real estate rose 0.33%. You can view the comparison on Google Finance. This week, I will continue to own XRE.