It’s becoming more and more difficult to remain optimistic on stocks. The past week saw the stock market drop 1.1%. Still, each of the past three months have been positive and stocks look as though they’re headed higher for the moment. In a portfolio that’s balanced between stocks and bonds, the advantage of bonds has passed and the portfolio should be restored to policy weights. For a portfolio using an asset rotation strategy, US stocks (SPY) continue to be in favour. I will continue to own real estate (XRE) in order to minimize trading and avoid currency exchange.

The economy doesn’t look particularly strong presently. Interest rates remain very low and inflation is also quite low. The government seems to be doing what it can to stimulate the economy, waiting for businesses to repair their balance sheets and be prepared to invest back into the economy. This cautious outlook may be the explanation of why my fair value estimate for the stock market remains low. It has improved marginally, and the TSX appears to be only around 4% over-valued currently.

Remember when I said that the summer would likely not bring about a change in the direction of the stock market (or, rather, directionless wandering), but that I was waiting for September or October? Even though the first signs of positive change are showing, I’m not extremely confident that the market has definitively changed directions. I want to continue to see what the two months that have traditionally been the most volatile have in store.

Market Outlook September 3, 2012

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