Whenever the Dow Jones Industrial Average goes through a 100 point barrier or milestone, the reaction is ... no reaction. Back in the 1970s, a 100 point breakthrough was cause to stop and reflect on the markets strength, or its vulnerability. It was a milestone. Now this thought process occurs at the 1000 point breakthrough.
So, what is the Dow approaching 13,000 telling us, the investing world?
Professional portfolio managers are evaluated and judged mostly on their performance versus the S&P 500 Index. However, whenever someone asks "How's the market doing?" the answer is almost always quoted in the Dow Jones' movement. Investors, professionals and individuals are conditioned to this automatic response. We are creatures of habit!
The question will be invariably asked of every talking head if the Dow hits 13,000: Where do we go from here? This earnings season is about half way finished and the general health of the U.S. economy is pretty good and pretty resilient. We know the internet sector and its attendant technologies are growing in the 30%+ range, with Google Inc. (NASDAQ: GOOG) being the flag bearer. Google is the "next" whatever mega-company moniker you want to call it. The general condition of technology is good. The leader board is changing around some of the top names, like Apple Inc. (NASDAQ: AAPL), Salesforce.com (NYSE: CRM) and Google.
The health of the American banking and financial services sector has proven to be strong in the face of sub-prime mortgage issues and a general weakening real estate market. The large U.S. banks that have reported showed strength in fee income, basic underwriting activity and net deposit in-flows -- all good signs. Sub-prime and other suspect loans are being managed, monitored and dealt with by the American financial services companies.
Health care, energy, retailers, consumer staples and even cyclical companies have held their own in this earnings season. More importantly, most companies that have reported have been optimistic about the second quarter outlook and even the remainder of 2007.
Many professional portfolio managers feel the U.S. market still offers growth at a reasonable current multiple. The S&P 500 and the Dow 30 are trading at about 15 times expected 2007 earnings-- not expensive. This has also spawned the huge amount of merger and acquisition activity. Not a week goes by without at least one to two "mega-deals" announced. The activity is heightened because general valuations are not out of whack. The deals are done with a 3-7-year view of future valuations and the overwhelming conclusions are that current takeover prices are still attractive.
So get ready for Dow 13,000.
Will we see 14,000 before the end of 2007? I hope so, but I also think so. However, as the market always does, it will be a wild ride with lots of fluctuations and head fakes along the way.
Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas please visit the web site
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Reader Comments (Page 1 of 1)
4-20-2007 @ 6:09PM
Dennis said...
DOW 13,000 – are you kidding me?? It never ceases to amaze me at how Wallcheat makes 1 + 1 = 3. Is there really any question that the US economy is slowing significantly and that a recession is lurking? Here are some things to think about:
-Inflation remains stubbornly high while the dollar has reached a 26 year low against the British Pound. The Fed is now more likely to raise interest rates to combat inflation and strengthen the dollar than to lower them to boost the economy.
-The housing market is tumbling, foreclosures are skyrocketing, and builders’ profits are plunging.
-We have the worst savings rate (negative) since the Great Depression, while debt levels, both private and Government, are at historic highs.
-The trade deficit only seems to get worse as we continue to outsource key industries to other countries (especially manufacturing) and our appetite for foreign goods never seems to cease.
-Energy prices remain stubbornly high ($3 a gallon for gas becoming more and more common), and the hurricane season is just around the corner.
I could go on and on but hey, this is all good news, right? At least that’s what Wallcheat would have you believe, and sadly, we seem to be buying it. Please, someone explain to me, seriously, how stock prices are going up when the economy is unquestionably slowing down. To me, it’s starting to look a lot like the year 2000 all over again. We never learn……..