ECONOMIC AND STOCK MARKET COMMENTARY

This year is starting to look a lot like its two predecessors, with a succession of roadblocks thrown in the economy’s path early in the year followed by some irregular gains as the spring progresses. To wit, we now are seeing some selective recovery in manufacturing, additional gains in nonmanufacturing, and a shrinkage in our still-massive global trade deficit. Although there are differences in the specifics of 2016’s recovery— vis-a-vis 2014 and 2015—the overall picture is strikingly similar to what it was in the earlier years.

As before, a choppy showing is likely for the full year, with ongoing resilience in housing and job growth, and projected gains in manufacturing and nonmanufacturing, being offset to a degree by stubborn weakness in consumer spending and a downturn in business investment. All of this is similar to the way in which the last two years evolved, that is, with an economy that wilted early, but gained traction as the second quarter took hold. Thereafter, we saw an uneven trend in the third and fourth quarters, leading to growth of just 2.4% for each of those years. We likely face a similar scenario in 2016.

So the Federal Reserve is likely to move gingerly on the monetary front, with any move to raise interest rates probably held off until midyear or later. And even then, rate hikes figure to be small, as questions linger, especially off shore, where China put out a weak manufacturing report last week and Great Britain could yet exit the euro zone.

The recent first-quarter earnings season had a familiar ring to it, as more companies than not did little more than match their previously lowered, and generally unimposing, sales and profit targets. Those that did perform as expected and did not lower their guidance saw their stock prices do fairly well, even gaining in some instances; others, in less-forgiving situations, often felt the wrath of Wall Street.

Through it all, the stock market is managing to hold its own, with any selloffs generally confined to a session or two. This resilience—after a sharp decline early in the year and a vigorous comeback thereafter—has caused valuations to become a little stretched. Nevertheless . . .

Conclusion: We remain guardedly optimistic in our stock market outlook.

Source:  Valueline.com