So, the market is finally taking a break. First quarter earnings were nothing short of excellent and stock prices are taking a well deserve rest.
I don’t think it will last, but a break is useful nonetheless. We still have excellent fundamentals in the current economy and the medium-term trend for the broad market indices looks to be intact.
Corporate earnings are very good, and they continue to rise. Companies are running lean operations and they are still looking to hire lots of new people. Even though interest rates are rising, the cost of money is still very affordable. The growth in real estate prices is slowing in some areas, but this is a good thing.
People are worried about commodity prices and rightly so. But, we have to have a period where the economic system tries to balance itself out and this is what’s taking place right now in the commodities market.
2006 will still be the year of precious metals, but I think that oil prices and precious metal prices will calm down towards the end of this year. My best guess is that agricultural commodities will take off in 2007, and farmers will get much better prices for their crops. This, in my view, is well deserved because farmers have had weak commodity markets for decades.
So, I see the broader stock market experiencing some downside over the very near-term, but the medium-term trend is still intact. In the absence of earnings news, the stock market is vulnerable. The market will concentrate on inflationary news and this means a small correction right now.
If I had new money to invest I would keep it in a money market fund and would not be in any rush to take on new positions. A better entry time for taking on new positions will present itself around second quarter earnings season.