The past week was one of the rare weeks where stocks and bonds both advanced. Stocks are still struggling against negative long-term momentum, and bonds are clearly the favourite. Interest rates remain low, inflation remains in check and central banks continue to be committed to supporting the economy. As such, a bear market doesn’t seem likely, although global economic news is hardly rosy. Europe faces economic and political turmoil and seems unsure of how to resolve the current mess.

Due to the prevailing taste for bonds, a balanced portfolio would do well to continue to overweight bonds relative to stocks. Asset rotation indicates another week of owning gold (IGT). Last week I was worried, with stocks performing well, that owning gold would be unprofitable, but I was mistaken. Perhaps some of the selling pressure on stocks subsided, but money continues to flow to gold. It rose 1.6% over the past week, mostly on Monday and Tuesday. Although I can’t predict what will happen over the coming week, I am reasonably certain that investors are nervous and that gold, even if it doesn’t profit, should be relatively stable since it provides a safe haven.

The stock market remains about 10% undervalued, according to my estimate. Now that we’re well into June, I don’t expect to see much stock market-related action over the summer. I think that influential investors will return in the fall to take stock of the updated global economy and to determine whether or not a shift back into equities is warranted. I’m reminded that sometimes the best course of action is to do nothing.

Market Outlook June 18, 2012

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