I can’t explain why, but I continue to feel more and more positive about stocks this year. Perhaps the consumer confidence numbers are rubbing off on me. Inflation is a threat and interest rates are going up, yet 2006 continues to look great to me.
I suppose my enthusiasm is in part due to the financial system’s return to equilibrium. The Federal Reserve did its best in lowering interest rates to deal with all the economic and political shocks just a few years ago. Thank goodness there wasn’t a serious recession after 9/11. There very easily could have been. Now, interest rates reflect the strength in the economy and, in my view, are just about perfect to keep the housing market in check.
Take this fundamental backdrop, mix in strong corporate earnings- -and presto–you’ve got the makings of a rising stock market!
I do see the need for some caution over the next several months, but there’s no reason right now why the stock market can’t rally big time later this year. A lot of economists are calling for the economy to slow significantly during the latter half of 2006, but I don’t see it. The Main Street economy is likely to slow a little along with the real estate market, but with employment and corporate earnings so strong, I think GDP will surprise to the upside.
Of course, this means another interest rate hike, but the market is ready for this eventuality. Oil prices remain very high (by historical standards) but once again, the market has already factored this in to its pricing.
So, if the next three quarters remains status quo, I’m inclined to feel pretty bullish. If current fundamentals remain intact and the stock market takes a rest this summer and early autumn, hands down I’d be a buyer.