That happy, optimistic feeling about the stock market is coming back. There are still risks, and the outlook could change at any time (like usual), but the stock market has posted some impressive returns over the past couple weeks. This past week (really just Thursday and Friday) saw an increase of 1.9%. Since mid-July, the market has risen 9.4%. The lowest point of the year was on May 18 (at 11,280.64) with a lot of volatility over the following two months. Since July, the market return has been more positive, with less volatility.

Stocks continue to have greater momentum than bonds. A big part of this is likely due to the fact that the 200-day return for stocks has finally turned positive, at 4.52% compared to 0.29% for bonds. Over 50 days, stocks have returned 8.61% compared to -0.92% for bonds. I now harbour very little hesitation in pointing out that the market appears to favour an overweight position in stocks at this time. A portfolio that further differentiates between asset classes, US small caps (IWM) continue to present the greatest momentum. Hong Kong stocks (EWH) also appear to hold good potential and, surprisingly, gold has recently posted impressive gains. In Canadian stocks, large caps seem to have a slight advantage over small caps.

My greatest reservation lies in the fundamentals of the market. The average P/E of the TSX has risen to 17.53, which suggests that the optimism that’s causing the market to rise is not based on companies’ earnings. By that measure, the market could be considered almost 10% over-valued. This is normal, coming out of a recession, since the stock market is “forward looking”, but it provides food for thought.

Market Outlook September 17, 2012

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