In my last column, I wrote that I was getting more bullish on the stock market’s prospects. This is especially the case with large-cap stocks trading around their all-time highs.
There are still, however, a lot of risks in this economy and the real estate market is going to be the big drag on things well into 2008. The good news from the slumping real estate market, other than a return to equilibrium in the subprime mortgage market, is the increasing likelihood of more interest-rate reductions. The Federal Reserve is the one saying that the housing market will be a significant drag on the economy and, if inflation stays under control, the central bank has indicated it could drop rates further.
Not only would this action directly help borrowers, but it would help the equity markets, which are still looking for some direction right now.
It’s still very early into third-quarter earnings and so far what we’re getting is a mixed bag of earnings results. There aren’t that many standouts so far. There have been several disappointments. No one should be surprised that the large financial institutions are taking hits to their earnings — they’re the ones that created the credit crisis in the first place.
General Electric Company (NYSE/GE) (a great benchmark company if there ever was one) met Wall Street estimates and the stock is holding up very well. Johnson & Johnson (NYSE/JNJ) reported weaker profits, but the company did raise its view for 2008. So, what we’re getting so far is no real excitement. If we continue to get earnings like this over the coming weeks, then clearly, the only way the stock market can rally through to the end of the year is with further interest-rate reductions.
Like I said at the beginning of the year, 2007 is all up to the Fed.