Big day for the stock market yesterday! First, the Fed comes out of its first open market committee meeting of the year to say U.S. interest rates will remain unchanged. Then Google announces its fourth quarter profit nearly tripled to $1 billion. Any wonder that the Dow Jones Industrial Average jumped about 100 points?
The U.S. Federal Reserve has not raised interest rates in five consecutive meetings. The Fed’s statement yesterday was clear: It believes the housing market is stabilizing, while it continues to be concerned about inflationary pressures. For the first time in years, there is genuine disagreement between economists as to where interest rates are going this year. Some analysts are actually calling for higher rates by the spring, while others are expecting rates to be cut by the summer.
Is there anyone not using Google as a search engine on the Internet these days? $1 billion sounds like a big profit. But we need to keep the earnings per share in perspective. Google only earned $3.39 per share in the fourth quarter. If we use a multiplier of 4, Google could see $14 a share this year — paltry earnings for a company whose stock trades at $500. We’re talking 36 times earnings for Google stock.
Sure, the news was very positive on the Fed not raising interest rates and Google’s profit tripling. But the big news for me yesterday was the monthly performance of the Dow. The world’s most widely followed stock index was up 1% in January.
My little secret: I believe in the January Effect — an old indicator that says if the market is up strongly in January, the market is usually up for the remainder of the year. With the Dow Jones Industrial Average being up only 1% in January, the chances of a big stock market rally this year do not look promising.
But if we apply the January Effect to another investment, we see a definite trend ahead. Gold bullion was up a whopping 3% in January… adding fuel to my theory that 2007 will be a huge winning year for gold bullion and gold stocks.