Under Promise, Over Deliver
While bullish last Fall we were nonetheless surprised by the scope and magnitude of the market’s advance in the fourth quarterof 2006. This occurred despite a significant decline in residential housing, the ongoing turmoil in the Middle East, and a significant shift in the make-up of the Congress.
We believe the market rally was fueled by unexpectedly strong earnings gains, attractive valuations (thanks to stable interest rates), falling energy prices, a significant amount of M&A activity, and thankfully, a lack of natural or manmade disasters during the quarter. Recent reports released by the Departments of Commerce and Labor have increased our confidence that the US economy can sustain reasonable levels of growth in 2007 without a meaningful risk of accelerating inflation. As a result, we believe that 2007 offers promise for investors in equity markets globally and particularly here at home.
We also adhere to the view that larger cap stocks are likely to out-perform small/mid cap stocks in 2007 after years lagging behind.
At this point in the market cycle, we believe small cap valuations have become stretched beyond their normal ranges. Investor expectations for smaller companies seem elevated as well, leaving little room for disappointments. And disappointmentscan lead to sharp corrections in small cap stock prices.
On the other hand, we feel many large cap stocks are selling at much more appealing valuation levels. Investor expectations remain subdued and many analysts are expecting slowing growth. This sets up the favorable scenario of larger companies exceeding expectations as they report year end results and offer forecasts for 2007. For investors, it's almost always better for companies to under promise and over deliver.
The choppiness of the market in the opening weeks of the new year is a sign of investor nervousness and uncertainty as they try to position their portfolios for 2007. While we believe the current environment looks favorable, we remain concerned about the potential impact of geopolitical events, uncertainty resulting from the change in Congressional leadership, and the potential for an adverse policy shift by the Fed.
Nevertheless, as it stands today, it looks as if 2007 will be another positive year for stocks.
We believe the market rally was fueled by unexpectedly strong earnings gains, attractive valuations (thanks to stable interest rates), falling energy prices, a significant amount of M&A activity, and thankfully, a lack of natural or manmade disasters during the quarter. Recent reports released by the Departments of Commerce and Labor have increased our confidence that the US economy can sustain reasonable levels of growth in 2007 without a meaningful risk of accelerating inflation. As a result, we believe that 2007 offers promise for investors in equity markets globally and particularly here at home.
We also adhere to the view that larger cap stocks are likely to out-perform small/mid cap stocks in 2007 after years lagging behind.
At this point in the market cycle, we believe small cap valuations have become stretched beyond their normal ranges. Investor expectations for smaller companies seem elevated as well, leaving little room for disappointments. And disappointmentscan lead to sharp corrections in small cap stock prices.
On the other hand, we feel many large cap stocks are selling at much more appealing valuation levels. Investor expectations remain subdued and many analysts are expecting slowing growth. This sets up the favorable scenario of larger companies exceeding expectations as they report year end results and offer forecasts for 2007. For investors, it's almost always better for companies to under promise and over deliver.
The choppiness of the market in the opening weeks of the new year is a sign of investor nervousness and uncertainty as they try to position their portfolios for 2007. While we believe the current environment looks favorable, we remain concerned about the potential impact of geopolitical events, uncertainty resulting from the change in Congressional leadership, and the potential for an adverse policy shift by the Fed.
Nevertheless, as it stands today, it looks as if 2007 will be another positive year for stocks.
Labels: economy, forecast, interest rates, stock market
posted by Under A Buttonwood Tree at 10:20 AM
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