I don’t need to do a lot of fancy math to know that the stock market does not look healthy. After this past week, as the newspapers have pointed out, it looks more pessimistic than at any time over the past two and a half years. Since June, I have suggested that bonds are a better place to be, and that continues to be true. Not having followed my own advice (because I enjoy my dividend cheques), I remain hopeful that stocks will surprise me and perform above expectations. But hope is not a strategy.

In my asset rotation account, I continue to own gold. It hasn’t protected value over the last week, but neither has anything else. When I mentioned that real estate looked promising last Friady, it turned out to be just a blip (which reversed itself on Monday). Bonds are starting to look like a safe haven. But when I said that bond yields hardly look like they could go lower, I was wrong; bonds yields are lower. In fact, they are almost lower than they have, including in 2008-2009. The posted 5-year mortgage rate has also dropped from 5.39% to 5.19%. Inflation is higher, at 3.1%. That could cause policy makers to raise interest rates, which would be a headwind for the economy and negatively impact the markets. However, that seems likely, given the weakness in other national economies.

I’m a little embarrassed to think back to what I wrote last week, saying that the market sure looks cheap. I would have been smarter to say that there were no indications of a market bottom. Because markets are even cheaper today than last week. According to my fair value calculation, which has remained fairly steady, markets are slightly undervalued. For interest’s sake, my fair value estimate is a range between 9,400 and 15,800, with 12,200 as the mid-point. In a market that is rising, the value is generally a little above my estimate. It is currently 6.1% below.

Market Outlook September 26, 2011

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