The stock market had another negative week, down almost 2%. The good news, for me, is that my stocks have done better. I’m very glad that I owned real estate (XRE) this past week. All the other asset classes were negative, except gold which gained $0.01. The stock market doesn’t have the momentum to appear more attractive than bonds, which should continue to be overweighted. I will continue to own real estate this week.

My fair market estimate for the stock market seems to have fallen back a bit, settling right around the current value (something around 12,600). In a departure from a few months back, the market is now predicting over 4% earnings growth over the next 12 months. I guess earnings haven’t been very impressive this season.

I mentioned it last week, but I’m still surprised at the level of 10 year Government of Canada bonds. This week they’re yielding 2.48%, while inflation is reported at 2.50%. “Investors” (in the loosest sense of the term) are willing to accept a guaranteed return of -0.02% per year over 10 years. A guaranteed loss! I guess they’re actually betting that inflation will come in below 2.5%. Real return bonds are yielding 0.47% (+ inflation), which translates to an inflation expectation of 2.01%. The Bank of Canada must be pleased, but a real return of less than half a percent is very pessimistic.

Market Outlook March 12, 2012

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