The Trend Bodes Well

So far, first quarter numbers are great. Large-cap and small-cap companies are doing well. We know that the economy is slowing, but corporations are reporting great numbers. Even with gross domestic product (GDP) coming in at a lackluster 1.3% annualized rate in the first quarter, we’re amazed at how many companies are reporting double-digit sales and earnings growth.

It’s going to be a tough year for the Federal Reserve. The central bank doesn’t want the economy to go into recession, but it doesn’t want inflation to get out of hand. The economy needs lower interest rates to stimulate growth, while inflation needs higher interest rates to keep control of prices. It’s a catch-22 situation, and there is no right answer.

As an investor, my view is that we can eliminate monetary policy in our investment strategy. The Federal Reserve isn’t likely to do anything over the near term. Accordingly, we can only focus on economic and corporate fundamentals. The good news is that we already know that most public companies are in solid shape.

With this backdrop, I have to say once again how impressive the broader stock market’s been over the last month. Stocks began the year with a decent January, then pulled back hard in February. Now, the broader market’s recovered all its losses and large-cap stocks are hitting new record highs. This trend does bode well for the rest of the year.

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With corporate earnings coming in solid, my outlook for the stock market this year has improved. If inflation gets under control over the coming quarters, then the stock market’s got it made. This year could turn out to be as much of a surprise as the last half of 2006.