ECONOMIC AND STOCK MARKET COMMENTARY

There have been a few small bumps in the road recently, with the latest month’s figures showing some early spring volume slippage at the carmakers, eased output in manufacturing, and softness in housing starts, but surprising strength in home sales.

However, the big picture hasn’t changed. True, after spottiness early in the year and a few weather-related pressures later on in the opening quarter, the expectation had been that activity would quicken as we neared midyear. And that might still be the case. But the somewhat mixed trends cited above and the uncertain outcome of legislative actions aimed at economic reform in Washington suggest that any uptick in business activity in the spring and summer will be moderate.

Wall Street continues to get support from Corporate America, and that is helping some key averages secure new milestones. To date, the vast majority of those companies already reporting their earnings have surpassed expectations. Indeed, the few high-profile misses, which have rattled investors, have been overwhelmed by those companies posting better-than-expected results.

Not surprisingly, the focus is back on Washington, where Congress and the White House are again attempting to fashion an overhaul of the health care system and generate momentum for tax reform. To date, the going has been slow amid the philosophical divide in the Capitol. Looking ahead, the pace and scope of legislative action (which could be affected by the weak first-quarter GDP showing), may have a bearing on the strength of the long-running, but uneven, economic expansion.

Meanwhile, things remain unsettled globally. To wit, political uncertainty, if eased for the moment, is still a fact of life in France; tensions are high with North Korea; and questions loom in our contentious relationships with China and Russia. So far, Wall Street is taking much of this in stride, but that could change if the international situation deteriorates notably.

Conclusion: With the economy continuing to edge forward and interest rates low enough to keep competition from bonds at bay, it is hard to see the bull market ending. But P/E ratios are extended, so additional gains, albeit possible, may not be secured easily.

Source: Valueline.com