Value Line remains cautiously upbeat on the markets' near term future...
valueline.com
The Value Line Investment Survey
Published August 11, 2006
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Economic and Stock Market Commentary
The economy is moving though the early stages of the second half in much the same way that it ended the initial six months, that is, with mostly small and uneven steps forward. For example, the first days of August saw the release of reports showing generally modest gains in construction spending, factory orders, manufacturing, and personal income. Nonmanufacturing activity also saw further improvement, albeit somewhat less than had been expected, while nonfarm payrolls rose by 113,000 in July. That increase, which was less than expected, was also below June's tepid gain of 124,000 new jobs.
We see little directional change over the next several months. We expect most of the major consumer and industrial markets to move ahead in a steady fashion during the current half, with the nation's gross domestic product—which rose by 2.5% in the second quarter—probably not picking up much additional speed. The soft housing market poses a potential risk to the business up cycle, although we think that relatively stable mortgage rates lessen the chances for a sharp decline in housing that could send the aggregate economy into a recession either later this year or in 2007.
Inflation is a concern. The high price of oil and gas and the earlier rise in commodity prices (such as copper and zinc) have raised inflation fears. However, the slowing pace of economic growth (which should trim the use of commodities, oil, and gas), and the general lack of serious wage pressures, owing to the lackluster job increases, should help reduce any tendency toward higher inflation over the next few quarters.
The global situation is a bigger worry. Here, the outlook is not very encouraging, as the warring parties in the Middle East show few inclinations to tone down their rhetoric or their fighting. The risk of a further surge in oil prices resulting from this global strife is considerable.
The stock market continues to chart a very volatile course, which is understandable given the current troubled state of international affairs and the concerns over inflation. Generally strong corporate earnings, a relatively stable economic outlook, and lower price-earnings ratios than earlier this year are positive offsets to this global uncertainty and strengthen the case for stocks.
Conclusion: We are upbeat about the stock market's prospects in the second half, but also acknowledge the considerable risks now present. Please refer to the inside back cover of Selection & Opinion for our Asset Allocation Model's current reading.
EK!!! |
