When deciding what goes into your stock portfolio, include in your decision-making process five factors, which, although external and outside the scope of your influence, are still very relevant to your individual portfolio. For example, it seems that these days all that both Bay and Wall Street want to know about are profits. If the bottom line is there, and then some, that is all that matters. But, if a company delivers puny profits, well, things could get ugly. So, check your stock pick’s earnings record, going back at least four quarters. If you don’t like what you see, don’t buy.
Also, watch the direction of interest rates in the coming months. There are two probable scenarios as far as where interest rates are headed. If interest rates stay put, or even go up, it would mean the economy is going where it is supposed to go. But, if interest rates are heading down, it can mean only one thing–the economy is slowing down and needs a boost. Judging by the housing market, manufacturing, and the greenback, the U.S. could be heading to a mild recession. And, while the situation in Canada is nowhere near this bleak, the ripple effect is something we should be thinking about.
Another factor to watch for is crude oil prices. Right now, due to exceptionally mild winter in North America, oil prices have eased considerably. However, analysts are still forecasting oil at $75.00 per barrel this year. It that pans out, the housing market could deteriorate further, especially in the U.S., and create consumer cash flow problems. If our largest trade partner runs out of money to buy our products, well, you get it, Canadians will feel the pinch just as much.
Moving on, regardless how much we try to ignore it, inflation could worsen in 2007. If prices increase, while consumers have less money in their wallets and producers have no choice but to keep the prices up because of the glorified bottom-line, inflation could rear its ugly head. In fact, it could even test safety levels economists are not comfortable with. If there is even a sniff of inflation, interest rates are likely to go up.
Finally, the political mess in the Middle East is broadening and deepening. This means that energy prices are likely to experience huge price swings, mostly in the upward direction, which could also mean that the world economies could choke on them.
As you can see, it is a delicate balancing act to structure your portfolio. Our advice has always been to do your homework before investing. Only now it might be prudent to expand that homework outside your portfolio. Sure, it means more work, but in the end, you’ll not regret it.