Posted by Shyam Moondra
Yesterday, the Federal Reserve Board announced that they expect to hold interest rates low for an extended period of time to let the economic recovery take firm hold. Today, the Labor Department announced that Producer Price Index declined by 0.6% in February. Low interest rates and low inflation are like music to the ears of the stock market and yet the market has moved up only slightly with a very low volume. It's possible that investors are holding back because of the recent mixed consumer confidence and housing data that prompted some to entertain the thought of second dip in the economy. However, those unfavorable economic indicators may have been distorted because of one of the most severe snowstorms in the North East region in the last fifty years.
It's hard to ignore the following encouraging signs that suggest that economic recovery would accelerate in the coming weeks and months:
· The corporations with low inventories are lean and mean; any up-tick in the demand for goods and services would significantly increase their profits and employment levels.
. Manufacturing has a lot of unused capacity which means that economy can recover without rekindling inflation.
· The corporate world has very strong balance sheets, hoarding over $1.4 trillion cash that could fuel the capital investments over the next couple of years.
· Consumers are being cautious because of lingering high unemployment level; however, they have also shown their willingness to make big purchases as is evident by a strong pick-up in the automobile sales. They will start spending more freely, once they are convinced that economic recovery is taking hold.
The present cautious stock market is in fact a prelude to a stronger and sustained up move with heavy volume in the coming days and weeks. Based on the forecasted 50% increase in corporate profits this year, the Dow Jones Industrial Average could head to 12,000 by the end of third quarter and even hit 13,000 by early next year.
As the paper profits pile up, investors would be tempted to take profits and thus DJIA's move to 13,000 would not be without wild swings. At any sign that the market has temporarily peaked, there will be a floodgate of profit taking which will push the market down but then bargain hunters will move in and the market will move up again on a short order. The key to maximizing the returns would then be to have a good sense of timing in terms when to take profits and when to move back in.
This year and the next are the golden opportunities for investors to make good money, but only if they could master the art of market timing.
