I’m looking at the current state of the stock market and I have to say that I’m getting more bullish. I know that the economy is slowing, but from Wall Street’s perspective, that’s a good thing.
All we need is for inflation expectations to be reduced, and no further action on the part of the Federal Reserve. If this happens by November, then we have the makings of a solid rally to go into 2007.
Corporate earnings are still solid. The economy, while slowing, is still quite impressive. There’s lots of employment out there and the real estate market is slowing from its frenzied pace. In my view, these are all positive developments for the stock market.
I mentioned inflation and interest rates, but there’s one other important factor in the economy that needs to be tamed before we can get a sustained stock market rally. Oil prices have to recede further.
Many Street analysts are calling for the price of oil to fall to approximately $50 a barrel in 2007. I can’t tell how important and how beneficial this would be for the economy and inflation expectations. Whether we like it or not, our economic well-being is tied to the black gold. Some kind of oil product exists in virtually all manufactured goods. It’s in the walls of our homes; it’s in the containers that store our food. Despite all the gains we’re making in alternative energy, the consumption of oil is here to stay for many decades to come.
If the price of oil goes below $60 a barrel, investor sentiment on Wall Street will get a lot stronger. My “gut” instinct is telling me that the chance of this happening in the near-term is getting better and better. This is why I expect a solid stock market rally later in the fourth quarter.