Quiet before the storm?

Happy Friday everyone!

I have not posted in a week because there really has not been much to comment on in terms of business activity, the economy, or investing.  However, today marks a return to posting, mostly because next week kicks off the first quarter earnings season.  What can we expect?

It’s my feeling that businesses will largely meet the earnings expectations that analysts have for them.  There will be some companies that will exceed expectations and some that will not.  However, on balance, it’s my feeling that earnings will be as expected.  This is a big deal.  Why?

For the last two years there has been tremendous unpredictability in earnings.  The mere fact that earnings are likely to have returned to predictability is an indication that the U.S. economy has finally stabilized.  In particular, I am impressed by two recent developments:

1.  Despite the fact that consumer confidence dropped dramatically in February, Americans still increased their spending slightly.  That is a strange combination that indicates to me that even in the face of nervousness folks still felt okay enough to buy stuff.  Which takes me to…

2.  In the month of March auto sales were up 24% in aggregate.  This is the most positive piece of economic news in several years.  It means that consumers are once again comfortable taking on debt and that lenders are once again willing to lend.  In other words, the mutual suspicion that has existed between consumers and lenders has abated.  The economy needs consumers to spend and lenders to lend in order to pump economic blood (money) through the economic body.

To summarize, the economy is finally stable in my opinion.  What’s more, the Obama Administration seems to have elected a cold war with Iran and Russia rather than direct confrontation.  That was the one, sole, gigantic, foreign policy thing that didn’t seem to be discounted by the financial markets.  Those crises seem to have passed.  Obama has ceded Central Asia back to Russia by looking away or through indifference.  Obama also seems to have calculated that it is easier to deal with an upset Israel than it is to confront Iran on the nuclear issue.  With these two issues put on the back burner, because they will not go away, the economy is left to grow unfettered.

So we have economic growth on firm foundations and no discountable shocks to the U.S. economy identifiable.  What does that mean for the financial markets going forward?  It’s my feeling that the stock markets are overvalued.  I think this is a scenario in which for the next two months we will see sideways to slightly up financial markets.  In other words, now would be the time to deploy some of that cash I have felt it was important enough to hold.

I hope that each of you has an excellent weekend.

Jason

At this point the only remaining economic hurdle to be overcome is an increase in employment.