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Some Bumps in the Road Ahead

03/12/2007 12:00 am EST


Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

Jim Lowell, editor of the Forbes ETF Advisor, thinks the market could suffer a broader and deeper correction than we've seen so far. But then he thinks it could head higher again later in the year.

I wouldn't be surprised to see the markets continue to give up some measurable ground inside the next several months simply because all major market indices remain at recent or historical highs [even after the recent sell-off].  But a bigger, broader, deeper and more sustained pullback wouldn't surprise me a bit.

Let's take a look at some of the trends that support the markets as they stand today.

Earnings: The fourth quarter is likely to register a low double-digit earnings growth gain on the order of 11%. That's solid enough to sustain current price levels, but not nearly enough to propel them much higher.

Energy prices: So far this year, oil prices have moved down from $61 to as low as $50 per barrel,
only to move back to about where they began. If economic conditions deteriorate markedly here at home or measurably abroad, look for lower prices.

Mergers and acquisitions: 2006 was a record-breaking year for M&A activity, and 2007 is shaping up to be another banner year.

Company buybacks: Share buybacks, [which] tend to bolster both the individual company and the market, are typically a sign that the company views its own stock price as attractively valued and a worthwhile investment.

Global economy: Global growth continued to heat up last month. Overseas, the European Central Bank (ECB) and the Bank of Japan (BOJ), the equivalents to our Fed, were raising rates in an effort to rein in economic growth.

Jobs: We're in the midst of a jobs market that just won't quit. Of all these trends, I continue to think this one holds the key for sustainable economic and market growth.

Goldilocks: The Fed's soft landing (an economy that is not too hot and not too cold) is currently viewed and priced by the stock and bond market as a done deal. For the third quarter in a row the economy grew at less than 3%; lower than consensus estimates, but still in line with slow-growth, not no-growthassessments.

Home sales and home equity values:  New home sales plummeted nearly 17% in January (937,000 units were sold)--the biggest drop in 13 years and a key technical break below the one-million-units-sold-per-month mark.

The positive trends supporting current price levels are vulnerable to a pullback and the three bears I'd be most worried about [are] consumer spending, home equity values, and our fairy tale rally's promise of a happy ending.

I continue to think that when (not if) any one of the above trends hits a bump in their road, we can expect further sell-offs.

That's why I'm looking for volatility and risks to escalate until we get that moderate 10% or more retrenchment in the stock markets at home and abroad. Once we do, I'd expect that by year-end our portfolios will propel us to the kind of high water mark we like best: gains.

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