Apparently, 2006 wasn’t a year for bears on the stock market or for that matter, the football field. Stock indexes were up for the year across the board Despite the continued violence in Iraq and government overspending, the economy seems to live in a sublime world where dividends keep coming, CEO pay is luxurious and the stock market looks like the bulls are back.
Confused as to why this paradox exists, considering certain fundamentals, I checked our stock outlook last March to see what was forecasted and found that views were mixed. There was great uncertainty; after all a new Federal Reserve chairman was coming in, the commodities markets, especially energies, were very bullish and certain earnings reports were sluggish. No one was predicting a bad stock market, but no one thought it would be as bullish as it turned out; certainly they didn’t expect double-digit returns in the stock market. The most bullish indicator last year: the technical outlook.
So as we begin 2007, we see new highs early on but some restlessness and uncertainly in the marketplace. The percent of U.S. companies missing earning projections is at the highest level in two years, according to the Financial Times. And though we hear about the record earnings of companies such as Exxon and Merrill Lynch, the bread basket companies are not faring as well, or others, such as Ford Motors, are in dismal states.
Unfortunately, we close the issue before U.S. Federal Reserve Chairman Ben S. Bernanke gives his testimony to Congress, perhaps offering a glimpse of what could happen with interest rates for the year. No one expects the Fed to alter direction, but any hint in a nervous market could cause a stock nose dive. Bernanke’s comments no doubt carry more weight than projections from the White House, which has a healthy outlook for the economy, albeit, forecasting slower growth than last year. The White House, though, is probably part of the market’s fear. With the president’s job approval ratings falling below 30% in most polls, the nation as a whole already is skeptical of what his administration has to say. The cost burden of Iraq weighs mightily on the mind of the average citizen, many whom have children who will have to pay down the debt, no matter what the White House espouses on that front. Further, the effects the Iraqi war is having on the U.S. military and U.S. standing in the world is even more troublesome to the populace, thus consumers, and thus the market.
But last year we had similar problems: interest rate uncertainty, twin deficits, a weak dollar, a questionable housing market and, of course, the Iraqi war. Despite that, the economy generally did well in 2006. So why the jitters now? What makes it different?
As if thumbing its nose at uncertainty, the stock indexes came out roaring in 2007. The Dow Jones Industrial Index blasted through 12,600, the S&P 500 topped 1450 and the Russell is at all-time highs. Surely these should be indicators for the rest of the year, yes?
Perhaps not. Anyone who watched this year’s Super Bowl may believe a fast start isn’t such a good thing. The Chicago Bears came out roaring with a run back for a touchdown on the opening kick. But then the Indianapolis Colts systematically scored, highlighting the true fundamentals: The better team won. It may just be a disillusioned Bears fan talking, but I saw it as a sign. That Bears fast start and ultimate loss could be an indicator of the stock market’s movement for the year. Fundamentals might take hold. Call it the February effect.
