Not good. That’s basically the market outlook, summed up in two words. The fact that I’m summing up my market outlook in two words shows that I’m tiring of watching the market. But the market doesn’t care whether or not I’m ready for some good news, the bad news just keeps rolling in. I don’t see bad economic news, because corporate earnings appear to be holding up. Rather, it’s uncertainty and a lot of “what if” followed by negative scenarios. While that certainly translates into lower stock market prices, it also means that the market will turn, not on company performance improvement, but on sentiment improvement, which can be quicker, but also more volatile.

Given three weeks of negative stock market performance, stocks appear much less attractive than bonds. That was already the case, but it is even more pronounced than at any time since early October. That doesn’t mean the outlook for the economy isn’t good (it may or may not be), but that the prevailing attitude toward equity ownership is negative. A traditional portfolio should remain underweight stocks and overweight bonds. A more adventurous portfolio should focus on owning gold (IGT).

The stock market appears more undervalued now, at 7.5% below my fair value estimate, than it has in recent months. Corporate earnings are supportive of a stock market value between 9,600 and 16,000, depending on outlook. The mid-point is 12,400, with the market level at 11,500. It could always go lower, but it appears cheap at the moment.

Market Outlook November 28, 2011

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