Tuesday, November 23, 2010

No Time to Panic

Stocks are getting ripped by North Korea and Ireland, with all the fears that go along with those two stories. People should not panic. A lot of good news out there is suggesting a strong economy, regardless of what the Fed says.

Third-quarter real GDP was revised up from 2 to 2.5 percent, including better consumer spending. And inside the report, business equipment and software investment is growing 19 percent year-on-year. But the really important news in the revision is a continuation of strong business profits. After-tax profits are up 28 percent from year-ago levels. Domestic financial profits are up 28 percent. And domestic profits for non-financial corporations are up 40 percent.

Profits are the mother’s milk of stocks, business, and the economy.

We had a string of positive economic reports in October, including stronger retails sales and factory output. And via Mark Perry of the Carpe Diem blog, Thompson Reuters reports that mall traffic for November is showing a steep rise.

Employment trends are getting slightly better. Housing is not, and that’s the biggest glitch in my narrative. But it doesn’t seem to be getting any worse. And believe it or not, for whatever reasons, the dollar has been relatively steady of late. America is still a safe haven in times of stress.

What’s left to be done is a temporary extension of the Bush tax cuts. When that occurs, stocks could be poised for another large rally. Strong profits, a positive yield curve, the Fed greasing the wheels (for better or worse), improved business activity, and slowly recovering consumers all add up to positive market fundamentals.