It was a good week for everyone. Stocks rose 0.72% while bonds rose 0.41%. Even though interest rates remain very low, they have the appearance of favouring a healthy economy. The inflation expectation is a little under 2% and the term spread is positive. Low rates should make it easier for leveraged companies to remain profitable, while the positive slope of the yield curve makes lending profitable for banks.

The momentum of stocks is approaching that of bonds. The last time that happened was in March (4 months ago), and the situation quickly reversed to favour bonds once again. It’s too soon to tell what will happen, but a couple more positive weeks for stocks could indicate the time to rebalance portfolios in favour of stocks. For now, it’s time to watch and wait. As for the asset rotation strategy, I’m disappointed that the favour has moved from US small caps (IWM) to real estate (XRE) so quickly. The cost of switching into IWM was very high, and because it’s fallen from first place to only second, I’m maintaining it in one account. The other account was too small to warrant the trade, so I moved it remained in XRE.

Although the TSX rose around 100 points since last week, the valuation estimate remains similar. It still appears to be undervalued and is still discounting negative earnings growth. Anyone who disagrees with that baked-in outlook might see this as a buying opportunity, although they’ll likely require some patience before the perspective of the majority of investors shifts to match and draw the market higher.

Market Outlook July 9, 2012

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