The stock market fell about 1.8% over the past week. Negative news continues to put investors on edge. Employment in the United States has been worse than was thought, with past numbers revised downwards. Unemployment in the US now stands at 8.2%, although that’s a far cry from 24% in Spain. As capital flows away from stocks, it appears to be flowing into bonds and gold.

A portfolio that is balanced between stocks and bonds should continue to be overweight bonds. Although bond yields are extremely low and it’s difficult for me to imagine them moving lower, that’s the indication. I should clarify that when I say “bonds”, I mean government and high quality corporate Canadian bonds. US government bonds would also be appropriate, although that’s not what I use in my model. Spanish or Greek bonds would simply be foolish to own.

For the asset rotation strategy, my model now indicates moving out of real estate into gold (IGT), following fund flows. Money appears to be moving into gold as a safe haven, and I can’t easily find a counter argument. I’ll be placing that trade today. The stock market is even more undervalued in the past and it is now pricing in corporate earnings that will fall, on average, almost 6% over the coming year. Yikes. Value investors and bargain hunters may be interested in searching for deals, but it appears unlikely that the market will stage a recovery in the coming weeks.

Market Outlook June 4, 2012

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