The stock market had a very positive week, rising 1.38%. At the same time, as is normal, bonds fell 0.98%. It may not have been fun for those whose portfolio is overweight bonds; over the last 10 weeks, stocks have slightly outperformed bonds, but bonds still hold the advantage (by over 5%) over the period of 40 weeks. Bonds continue to have greater momentum than bonds, although the comparison is approaching the point of equality. The last two times that happened, stocks fell afterward, so I’m curious to see what will happen. (I’m making no prediction.) For now, however, it’s too early to rebalance a portfolio away from bonds and toward stocks. For a portfolio that rotates between various asset classes, real estate (XRE) continues to be in favour.

Economic indicators show that the economy is (has been) in an area of moderate strength. There are problems, but there are also opportunities. It’s reassuring to know that the outlook is not overoptimistic, thereby overestimating potential growth and overpricing stocks. The stock market, while it feels “low”, is approximately fairly priced given the 2.0% GDP growth and 1.5% inflation rate. Both of those are a little lower than targets, but at least they’re both positive. If those numbers were to improve, especially the GDP growth, the economic outlook would improve and the stock market fair value estimate would rise. Normally, the nominal value of the market would rise along with the outlook, since investors try to predict future results.


Market Outlook July 30, 2012

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