Another uninspiring week. The market only ended about 0.25% lower than in began. But that marks the fourth consecutive week of negative performance. Although the global economic outlook appears somewhat more stable than it looked a month ago, cash does not seem to be flowing into risky assets. Bonds still have slightly more momentum than stocks, implying that a balanced portfolio should remain at policy weights, certainly not yet in favour of stocks.

Amongst the asset classes that I track, real estate (XRE) remains favoured, although the emerging markets remain very close. I saw a headline last week that said Canada’s was the worst performing stock market over the past 12 months except Spain’s. It makes me think that adding stock markets indices from additional developed and developing markets would be advisable.

When looking at the valuation of our stock market, the reasons for the above comparison and for the recent weak performance become more clear. My fair-value estimate has been falling, presumably as companies report disappointing earnings. If the market outperformed others for a year or two (which I believe it did in 2009 and 2010), then it would be normal that it would underperform now. Also, if the market value got ahead of the intrinsic value of its constituent companies, it would be reasonable that it would slow down to regain some equilibrium.

Market Outlook March 26, 2012

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