It seems as though every time I turn on CNBC there is a new, or sometimes not so new, pundit explaining why the market will falter soon. Most of these commentators have been making the same call for the last six months, while the market continues to steam higher. Though they all tell a story with the same ending, each of them approaches the gloom and doom scenario from a different angle.
Some hate housing: The builders are up 13% over the last three months and 24% over the last six.
Some blame inflation: Core CPI is down nearly 0.5% since the summer.
Some think energy prices will continue to soar: Oil prices are off over 25% since the summer.
From where I am sitting it looks like the doomsday pundits are running low on things to be wrong about.
That’s not to say there are not really risks out there. Housing is still weak, but it is becoming clearer every day that it is a supply demand problem and will likely be isolated to areas over built with supply. There was an article in the NY Times yesterday citing New York City’s increase in housing prices and strong demand. I would argue that last week’s 14.3% reduction in housing starts is good news; it shows that builders are slowing the supply side of the equation and allowing demand to catch up. Last week the Association of Home Builders released data that builder confidence was at its highest level in eight months. Apparently the builders’ agree.
With over 80% of the S&P500 having reported Q4 earning, Thompson’s Financial reports 10.8% earnings growth for the quarter. This is now the 14th straight quarter of double digit growth, and well exceeds December forecasts for Q4 growth. The most interesting part about earnings season was how nonchalantly investors took the news of anemic earnings projections for 2007. Weak 2007 growth could be the first real blemish on that shiny bull that we’ve all been watching over the last six months, though relatively low expectations leave plenty of room for upside.
The Fed has remained a non-factor thus far this year and will likely continue to stay on the sidelines as long as inflation remains contained and economic data oscillates between an expanding and contracting economy. With GDP estimates of the Fed and Wall Street both north of 3.0% there seems little reason to be concerned about the Fed choking off growth and risking a recession. The Fed’s focus, rightfully so, will probably continue to be on inflation and how to best stave it off during an economy expanding at trendline with full employment. The market is always in a balance; right now that balance seems delicate because the inflation wind keeps blowing making investors nervous. I believe the nervous sentiment is healthy as it leads to a lack of complacency, making the opportunity for an extended sell-off unlikely.