Great Numbers Reported by Caterpillar & Merck—Why the Trend Should Continue

We are seeing the market somewhat topping out at this time. Investors are greeting good earnings from brand-name companies with a little apathy. Of course, stock prices did already go up in anticipation for solid first-quarter numbers, so this is no surprise. The numbers from Merck & Co. Inc. (NYSE/MRK) and Caterpillar Inc. (NYSE/CAT) were excellent. So...what's next?It will take a bit of good fortune, but I think the S&P 500 Index can achieve 1,500 this year. We’ll likely get a correction or some sort of prolonged consolidation in the not-too-distant future and, barring any unforeseen shocks to the system, the stock market should reaccelerate due to continued growth in corporate earnings.

We are seeing the market somewhat topping out at this time. Investors are greeting good earnings from brand-name companies with a little apathy. Of course, stock prices did already go up in anticipation for solid first-quarter numbers, so this is no surprise. The numbers from Merck & Co. Inc. (NYSE/MRK) and Caterpillar Inc. (NYSE/CAT) were excellent.

There are some headwinds that stocks will have to face this year, and the big one is inflation, which is happening all over the world. A little price inflation is good. A lot of price inflation is bad. Most definitely, the devaluation of the U.S. dollar to prop up the economy is a double-edged sword. While this does have direct stimulus benefits, it also contributes to inflation, as most global commodities like oil and gold are priced in U.S. dollars, thereby aiding the inflation contagion. While there’s no prospect for interest-rate hikes at this time, they are inevitable.

The current economic situation seems destined to produce a period of low, but steady growth over the next several years. While this isn’t what the market is used to, low and steady actually makes it easier for monetary policy to change in a manner that’s more helpful. When we get strong periods of growth, the Federal Reserve wants to ramp up interest rates. What we don’t need now is anything drastic that could kill off the current economic recovery.

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The housing market continues to be a drag on the economy and investing in real estate isn’t likely to pay off anytime soon. There remains too much inventory for housing prices to accelerate in a meaningful way. The real estate market is still trying to balance itself out after its bubble burst.

The month of May has a tendency to be kind of slow for equity prices. With most companies reporting their first-quarter numbers in April, it isn’t surprising that stock market trading action may be lackluster this month.

I want to repeat a market view that I’ve had for a while. I do see the stock market able to tick higher later this year. I think it’s reasonable to expect a correction, perhaps soon. I also don’t think this is a market where investors need to be doing much that’s new. There’s no big rush to be investing in gold for example, even though the spot price of gold keeps hitting new records. The stock market has already done extremely well over the last eight months. Everything is due for a break.