Outlook for the Stock Market

Stocks look fairly valued, while the bond market continues to froth

Heather Brilliant, CFA 8 October, 2012 | 2:49PM

Summary:

  • We think the market looks pretty close to fairly valued at this point, with stocks under Morningstar coverage trading at 91% of fair value, using a market-capitalisation-weighted average. Due to the third-quarter rally, this represents an improvement from 83% of fair value at the end of the second quarter. High-quality names have done particularly well during this period, with wide-moat stocks trading at 96% of fair value.
  • Europe did not end up dragging down global markets in the third quarter as we had feared. European Central Bank president Mario Draghi's promise to do "whatever it takes" to save the euro freed the market to go on holiday, and the market's rally in August was driven by pretty low volumes. Although we're pleased to see Europe attacking its financial crisis head-on, we still have concerns about the region longer term.
  • Headline news in the fourth quarter will include the US presidential election. This quadrennial event always has the potential to put the market on edge, but we don't think it will materially affect company fundamentals. As we mentioned last quarter, we're still relatively optimistic about the outlook for the US economy, particularly when considered in the context of a weaker global economic picture.

In Depth:

August was a particularly quiet month this year, with top-tier markets marching slowly upwards on very low volumes as many traders and equity investors opted to take a summer break. In fact, this August was downright tranquil compared with the heightened volatility we saw in August of the last two years, and it was a welcome respite. Mario Draghi, president of the European Central Bank, calmed markets in late July with his comment that the ECB would do "whatever it takes" to save the euro, setting markets up for a nice rally throughout August.

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About Author

Heather Brilliant, CFA  Heather Brilliant, CFA, is the vice president of Global Equity and Credit Research at Morningstar.

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