Market Outlook
February 2005 - After a strong showing in the closing months of 2004, equity markets have pulled back in January from last year's highs. Is this the beginning of a new trend? What can investors expect this year?
2005 marks the third year of the bull market that started in October 2002, but we believe that there is enough momentum left to reward the disciplined investor with positive returns. However, markets will be increasingly volatile and will test investors’ convictions. Indeed, the cycle is getting old, earnings momentum has clearly peaked, and short-term interest rates are already on the way up. Consequently, the future of the stock market rests largely on the performance of the economy, which we trust will remain robust enough to validate earnings forecasts. But the most important piece of the puzzle remains inflation, thus the behavior of 10-year bond yields may provide a better gauge with which to value the relative attractiveness of earnings. Contrary to the majority of strategists that expect U.S. government bond yields to rise by at least 75 basis points to reach 5% this year, we are of the opinion that we could see, once again, a repeat of 2004 when yields fluctuated widely during the year, but finished the year basically unchanged from the previous year.
We believe that inflationary pressures are emanating from a few sectors, energy being the most visible, but the increased competition that results from the globalization of the world economy is creating deflationary forces that serve as a countering influence. As a result, bond yields will not rise sufficiently to derail the economic expansion, leaving additional room for equity prices to move higher. However, only the optimists at heart will reap the benefits.
The information contained in this article is prepared from sources believed to be reliable, but Dundee Securities Corporation makes no representations or warranties with respect to the accuracy, correctness or completeness of such information. Dundee Securities Corporation accepts no liability whatsoever for any loss arising from any use or reliance on this article or the information contained herein. Any reproduction in whole or in part of this article without permission is prohibited.
Source: Dundee Securities Corporation Research Department
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