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Market Review & Outlook November, 2010

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October continued to indicate that the economic healing process is progressing. In October North American indices had the following returns:

Returns for October 2010

As I have noted in my previous market commentaries, the fears of a double dip recession got overhyped last summer and the most recent economic releases have highlighted a more resilient US and global economy. To be sure, growth is slowing and many challenges remain. I expect the markets to remain volatile over the next year and plan to stay very proactive. I expect investors’ risk aversion to moderate heading into 2011 on the back of US employment data and another strong quarterly earnings season.

Interest rates in North America appear to be on "hold" for the foreseeable future. The Federal Reserve recently announced a second round of quantitative easing known as "QE2". For the month of October, US non-farm payrolls increased by 151,000 – well ahead of the forecast of 60,000. Job creation will need to remain strong. The current job gain trends in the US indicate it will take 8 to 10 years to reverse the approximately eight million jobs that were lost in the US in 2008 to 2009.

Earnings are reaffirming the gradual strengthening we are seeing in the markets. As of Thursday November 4th, 429 companies in the S&P500 have reported their 3rd quarter earnings. A convincing 72.2% of the companies reported positive earnings surprises.

It remains very likely that we will have very modest growth for the next four to five quarters and then hopefully after that, in 2012, fairly strong growth going forward. Based on Scotia Economics interest rate and currency forecasts, 12 to 18 month total return expectations range from 5% to 7% for equities, negative 3% for government bonds and 1% for cash. With statistics indicating that many households are either sitting with large cash reserves or having an overweight to the "safety" of bonds, they are likely not well positioned to outperform broad market indices over the longer term.

There continue to be attractive and strategic investment opportunities, but they must align with your own planning needs with regard to time horizon and risk tolerance.

I welcome the opportunity to discuss the information presented in this commentary or any other questions you may have regarding the other articles I have just posted to this site:

• Changes to the Canada Pension Plan (CPP)
• Scotia Economics Global Forecast Update
• Economics Indicator Dashboard