Saturday, April 21, 2007

Market & Economic News Update

The flurry of positive earnings reports and somewhat benign inflation news has given the Dow Jones Industrial Average enough legs to be within 39 points of the 13,000 mark, as the markets take a breather this weekend. Even with a 4.5% drop in Shanghai, the US markets barely blinked, before resuming their upward surge. Given all of the negatives lurking out there, such as the housing slowdown, the trade imbalance, the declining dollar and rising oil prices, the market has exhibited some remarkable strength. This is because the strong earnings demonstrate the economy may not have slowed as much as previously thought during the first quarter. If this strong economic performance continues during the second quarter, further gains in the averages should continue.

While the 13,000 mark is really of no consequence, other than a number attained, every time the average breaks a 1,000 point increment, it does give one the opportunity to pause and reflect about it being a milestone of sorts. Of course with the declining dollar, it is a good thing we are not evaluating our portfolios in Euros, because if that were the case, we might not be quite as ecstatic. While the decline in the dollar gives the indices a lift which boosts portfolio values and also improves the trade balance, too steep a decline can also be a trigger for inflation. What this means is the Federal Reserve will have to continue their balancing act between controlling inflation and moderating growth for the forseeable future. My guess is we could see interest rates remain in a holding pattern, unless economic growth picks up further in the second quarter.

The growth in Gross Domestic Product will be reported on Friday and Lehman Brothers is anticipating 1.8%, while the consensus is somewhere around 2.1%, less than the 2.5% growth in the fourth quarter of 2006. Anything below the 2% level will have investors clamoring for a rate cut, but I really don't think the Fed will comply. It is still a wait and see situation, which is a very familiar scenario at this juncture. Stay tuned for further updates.