Commentary; Posted: 2/7/07
The market and Puxsutawney Phil
David Purdy
Guest Columnist
We are off to a good start this year! The stock market has continued higher, with the S&P 500 stock price index up 2 percent year-to-date.
Also, recently a number of reports on the economy came out, mostly for the fourth quarter of 2006, showing that we are well positioned for good growth in 2007.
The report for fourth quarter Gross Domestic Product put real GDP growth at 3.5 percent for Q4 vs. 2 percent for Q3. Consumer spending was strong, home construction was down hard (probably the bottom), business capital spending showed a modest decline, inventory investment was light, and government spending began rising again.
Importantly, this report showed the biggest one quarter drop in the real trade deficit ever recorded!
I think these factors provide a great foundation for 2007. High consumer spending and low inventory investment points to rising production to restock shelves. The quick and brutal drop in home construction last year lowered the inventory of unsold homes.
I think low business capital spending in 2006 was the result of continued cost control that helps boost profits. And the fall in the trade deficit, with exports up 10 percent and imports down 3.2 percent, likely reflects our low, very competitive dollar exchange rate.
The payroll employment report for January 2007 shows a modest gain of 111,000 (continued cost control), but that report also includes a big upward revision to 2006, which added nearly one million jobs to the yearend total. The unemployment rate drifted up a notch to 4.6 percent, but remains remarkably low.
All this good news has been reflected in consumer sentiment which spiked five points higher in January, and the share of consumers agreeing that "jobs are plentiful" hit a five-year high.
Still, many on Wall Street see the glass as half empty, still worrying about inflation, company earnings, the Federal Reserve (Fed), the trade and budget deficits, and so on.
Higher inflation was considered a threat by many in 2006, but CPI inflation dropped from 3.4 percent in December 2005 to 2.6 percent in December 2006.
Company earnings growth was expected to slow, but instead S&P 500 operating earnings accelerated from 11 percent growth in Q3 2005 to 22 percent in Q3 2006. (We do not have Q4 results yet).
The Fed stopped tightening in August, despite widespread clamoring for more rate hikes. And, both the trade and the federal budget deficits are getting smaller.
So, while I am watching some real and potential risks, I continue to think 2007 will be a good year for the U.S. economy and financial markets.
And in the month of Groundhog Day, I want to note that Punxsutawney Phil did not see his shadow!
Statistics indicate this is bullish not only for a quick end to winter, but also for the stock market!
Writer David Purdy is president of Wealth Management Midwest, Forest Lake, and offers securities through Linsco/Private Ledger, Member NASD/SIPC And an investment advisor.
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