Unanimity on the Economy & Stocks,
Just Not on Inflation & Interest Rates

momentum tradesThe current momentum in stocks is well deserved. There’s no other place for large investors to invest their money and expect to get a return on investment greater than the rate of inflation. There’s also earnings momentum and that’s going to carry share prices further, at least over the very near term.

Big companies have been running lean and mean for the last several years, and any increase in revenues is going to go right to the bottom line. I think we’re going to see this in the upcoming fourth-quarter earnings season, as well as in the first and second quarters this year. Last year, big corporations told us that they were able to slightly raise their prices without affecting demand. This year, a growing economy will provide a much better backdrop for volume and price increases at big companies, so earnings growth should be robust.

As I’ve written over the last several months, investors can certainly own the market in the current environment. Investor sentiment seems strong enough to carry us right into the heart of earnings season and the corporate news so far, particularly in large-cap technology, has been very encouraging.

We’re getting continued strength in commodity-related investments. I’m also seeing some strong performances in the technology sector—both at the large- and small-cap levels. What we’re also getting are some near-term momentum trades that are making some serious money for speculators. The market hasn’t provided this kind of trading environment in quite a long time. Attractive momentum trades are happening now and this further solidifies the bullish case for stocks, at least in the short term.

I think there’s unanimity among investing types that the economy still has a long way to go before it gets “healthy” again. Employment and the housing market continue to be the big issues that need fixing domestically. There’s also some uneasiness in capital markets about inflation and interest rates and that monetary policy will have to change later this year to reflect global economic recovery.

So, the current trading action in stocks suggests that investors can reap a little while longer. A reversal is coming, but we’re not there yet.