Volatility has risen. This past week, the TSX experienced a large drop (Tuesday), a large rise (Thursday) and ended about 0.5% lower than it began. The total change wasn’t very large, but the ups and downs were greater than we’ve experienced recently.

Bond yields dropped and bond prices rose, while stock values fell. Obviously, that does nothing to reverse the trend of bonds outperforming stocks in Canada. My expectation, a couple weeks ago, that moving from overweight bonds to policy weights of stocks and bonds was not very well timed. Bonds have risen steadily over the past four weeks, while stocks have fallen each week. The real estate (XRE) sector continues to provide good performance and better momentum than any other asset class I follow. As such, that’s what I will continue to own this week.

The market seems to be reacting to a somewhat pessimistic outlook. If Greece is no longer grabbing headlines, it’s Spain or some other countries that may potentially be in an unfixable financial mess. The economic outlook is not rosy, and earning projections are likely falling. Although it’s only an estimate, the stock market valuation currently matches my fair value estimate almost exactly. There is none of the exuberance that existed prior to 2007 (and post 2003). While that’s a little disappointing, it should make purchase prices for stocks relatively attractive. And I always remind myself that I continue to receive my dividends.

Market Outlook April 16, 2012

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