Stock Market: A Lively First Quarter

After a first quarter that has been anything but dull, many investment analysts are taking a look backwards as they identify opportunities for the remainder of the year. The recent market corrections haven’t caused analysts to change their investment strategies radically, but smart investors always pay attention to past events that may indicate upcoming trends. It is also time to look at the Economic Growth Report for the fourth quarter of 2006, which was released at the end of March.

The data from the fourth quarter of 2006 showed U.S. economic growth continuing, but at rates lower than 2006 and 2005. The 2.5 percent economic growth rate reported for the last three months of 2006 helped buoy the market higher after several days of downturns. This burst of optimism puzzled some economists who, while acknowledging the growth rate exceeding the projected 2.2 percent for this quarterly time period, noted that comparable rates for the quarter ending March 31 are not expected to exceed 2 percent. Federal Reserve Chairman Bernanke has reiterated recently that the Fed’s primary goal is to tame inflation, not boost growth.

Corporate profits declined for the first time in five quarters falling by $4.9 billion (or at a quarterly rate of 0.3 percent) following a third quarter that posted an increase of 3.9 percent or $61.5 billion. Looking at these trends, many investment experts expect to see profits continue to retreat in the first two quarters of 2007. Many companies are sitting on significant cash reserves, so they still have plenty of borrowing power. It remains to be seen if these companies will choose to hold back on capital spending despite being cash-rich.

So what considerations should today’s investors ponder? Some investment analysts suggest a “wait-and-see” approach for now. Even within “troubled” industry sectors, experts have different opinions. Some recommend that investors avoid the temptation to “lump” everything into one large category and suggest that pockets of investment opportunity exist even in undesirable industries, if you look beyond the much publicized and most troubled segments (homebuilders in the area of real estate and sub-prime lenders in financial services come to mind here).

All in all, Wall Street has had a lot to process recently, including weak U.S. economic data, rumblings from Former Fed Chief Greenspan about possible recession, and slowing corporate profits. On the international front, China’s exchange woes in February showed how vulnerable we are to knee-jerk reactions from halfway around the globe. Prior to this issue, funds had been flowing into international and emerging market funds in staggering amounts. Some investment advisors are now suggesting that the ensuing drop-off could present a buying opportunity for investors who are not risk-adverse. For those interested in leveraging international growth opportunities, fund managers point to specific overseas markets that meet certain criteria, including both a growing number of middle-class consumers and a sound government.

When the pros are undecided, and as the debate continues, smart investors bide their time, too, but pay attention to the trends that grab the attention of the big players.

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