January: A Good Start for 2007

02/09/2007 12:00 am EST

Focus:

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor-in-chief of the Forbes ETF Advisor, says January offered strong economic news and healthy earnings reports. The only possible fly in the ointment: Housing, which may be in worse shape than the data suggest...

"The first month of the New Year displayed numerous signs and price patterns that we'll likely have to abide by for the foreseeable future.

"January's jobless claims moved wildly up and down in a narrow bandwidth of what remains historically low unemployment and a robust jobs market. Consumer confidence is steady and high thanks to the latter fact. New and existing home sales have begun to show signs of improvement: Median prices paid for both are improving and inventory looks to be decreasing.

"Despite the headline news (last year's drop in home sales turns were the biggest in 17 years), the median home price in December was unchanged from a year earlier, ending a four-month decline in median home prices. So, signs of potential life in the housing market are to be found.

"Of course, looks can be deceiving: Homes that haven't sold for a few months are being taken off the market with an eye toward bringing them back when the spring buyers return; houses are changing hands at lower selling prices or at prices that don't reflect incentives (from appliances to a new car in the driveway courtesy of a builder), and inventory was reduced by the major new home builders last year, which tends to hold price slides in abeyance.

"I'm also cognizant of a warning sign from the housing market that could have broader implications for our consumer-driven economy: In 2006 one out of every 92 households filed for foreclosure. Inflation continues to haunt the Fed, but with energy prices still well off their peaks, winter a will o' the wisp, and the geopolitical landscape looking no more volatile than it did a month ago, there's no urgency to tame what looks like cowed inflation from the stock market's perspective.

"The Fed's decision to leave rates unchanged left the firm impression that the economy remains on a slow-growth, not a no-growth, track. Overall, earnings reports are pointing to high-single-digit to low-double-digit earnings growth for 2007. The fourth quarter is shaping up to be the slowest earnings growth quarter in nearly five years. I continue to think that a 9% earnings growth rate is respectable enough for moderate growth from current price levels. The better news is that we're not beholden to only the US markets for earnings growth; the international markets continue to look relatively better from both a valuation and earnings perspective."

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