There’s still no good news for stock investors. Nervousness about the global economy persists, especially due to credit downgrades in Europe. Those countries’ governments are facing daunting fiscal challenges, but the potential problems don’t seem to have made their way into the economy yet. I say that because company earnings and profit still appear to be good. The greatest fear seems to be that this situation could translate into another credit crisis, where banks that loaned money to European governments lose money, reducing their capital. That would restrain their ability to make loans to businesses, perhaps going so far as calling in loans.

When I discuss the performance of “bonds” in these pages, I mean the iShares ETF that tracks the DEX bond universe. (Mostly Canadian federal and provincial, as well as financial firm bonds.) Canadian bonds continue to perform well and display better momentum than stocks. The greatest obstacle that I can see currently is the expectation for inflation, which seems to have risen steadily over the past few weeks. Investors seem to feel, however, that’s the safer bet compared to global equities.

Within stocks, real estate (XRE) continues to show the greatest momentum, and that’s what I continue to own. As has been the case for the past few weeks, the stock market appears undervalued. My fair value estimate is a little over 13,100, which appears optimistic. At the same time, should the European debt crisis appear to be maintained at some point, I fully expect the market to recover to 14,000, a level it reached in early 2011. The question, as always, is “when?”, I question I don’t have the answer to.

Market Outlook January 16, 2012

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