The 2007 Market at Midyear

By: ispeculatornew
Date posted: 06.13.2007 (12:00 am) | Write a Comment  (0 Comments)

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At the beginning of the year I gave my opinion that I thought the overall markets would be flat or down on the year. So far I have been proven incorrect as the Dow is up over 8% on the year and the Nasdaq is up 7%.

However, I still feel the U.S. markets have gotten ahead of themselves and they need to take a breather. The economy grew at a 0.6% clip the first three months of the year and the Fed is projecting growth of 2% to 3% in the current quarter. The growth in the economy certainly doesn’t justify the increases in the U.S. markets, especially considering the gains that were made last year.

So what keeps driving the markets? In my opinion it’s a combination of two things. First, there is excess liquidity. Money is easy to come by due to low interest rates and consequently there is plenty of money looking for a place to be invested. This in my opinion is the main reason most asset classes are going up (U.S. stocks, World stocks, commodities, precious metals, etc.) Low interest rates initially fed the housing bubble and now that the housing bubble has started to deflate a lot of the money that was going to real estate is going to other asset classes. This is also contributing to the rise in stocks.

Second, there is to a lack of pessimism. Investors are overlooking the substantial increases in the markets, especially world markets, and they continue to buy. In my opinion there is a general lack of fear in both U.S. and world markets (especially China). The markets keep going up without taking needed corrections. This is just going to lead to more severe corrections in the future.

So where do I think the U.S. markets are headed in the second half of the year? Barring a change in sentiment I think the markets will probably keep going up. However, the volatility the last couple of days shows investors are still unsure what’s going to happen. Consequently, I would recommend that you stick to stocks with solid fundamentals. 

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