 |
Integrity
Performance Service
|
|
|
|
|
|
|||||||||
|
|
||||||||
|
For the first time in years the sudden surge in domestic conditions is accompanied by a thriving global economy. The world’s second largest economy, Japan, has exited its deflationary era decisively. Consumer optimism is high, and both industrial and consumer activity in that country is rising. Business confidence indicators in the euro area are soaring, indicating accelerating growth in coming quarters. China continues its rapid development with the expansion almost at runaway levels. This growth has lifted the economies of most of the remainder of non-Japan Asia. The potential for accelerated private sector economic growth to lift people out of the dark cycle of poverty and despair is present today in many heavily populated areas of the world. The good news, however, has been accompanied by some ominous signs. The confluence of surging growth over a wide geographic footprint is causing inflation pressures to intensify. Until recently this pressure affected mainly companies in the early stages of manufacturing, which depend on commodities in their manufacturing processes. These companies were generally unsuccessful in passing along their cost increases, forcing managements to be more reliant on productivity gains than on pricing power to control costs. With early stage inflation isolated and contained, the gradualist policies of the Federal Reserve seemed adequate in forestalling a breakout of inflation to the general price level. Recent evidence casts doubt on the success of this approach. There are clear indications that some companies have been finding success in raising prices. The Consumer Price Index in both March and April showed hefty increases in services costs also, primarily rents. The change in the makeup and spread of inflation clearly spooked both the bond and stock markets, and significantly complicated Federal Reserve policy-making. Factors other than the fear of inflation are also contributing to the sense of unease. Fear that the Federal Reserve Board will be forced to raise interest rates higher than currently anticipated is a primary worry. The trade deficit continues to provoke concern over a possible slide in the dollar. The absence of spending discipline in the Congress is appalling to many, and the generally confused state of Washington politics raises questions about leadership at the highest levels of government. Terrorism and war are still depressants on the national spirit. Despite many concerns the domestic economy is in fine shape. It is on a course to deliver another year of solid growth in 2006. Moderation will be evident as early as the present quarter. The unusual burst of growth in the first quarter was caused by an exceptionally warm winter and the rebound in spending from the near shut down of our economy at the end of 2005, a victim of Katrina. Healthy productivity trends and severe price competition were obscured by the sudden burst of activity in the first quarter, but remain in place. They will continue to exert downward pressure on inflation. We expect the Federal Reserve Board to respond to the recent elevated levels of inflation with at least one more rate increase. However, we continue to believe that the long period of rising interest rates will be over by the end of the summer. The enormous positives of our economic system and the present healthy state of our economy belie the current fearsome investment climate. One of the distinguishing features of our economy is its flexibility. This attribute is in evidence today as the expansion transitions smoothly to industrial and capital spending from reliance on consumer spending and housing. Corporate cash flows are at record levels allowing continuing increases in capital spending, dividends, and stock buybacks. The American banking system, too, is in very strong condition today. We do not expect a flight from the dollar. To place all of this in perspective, we believe the underlying condition of the domestic economy is sound, it will continue to grow, and moderation will bring with it a slowdown in the rate of inflation. We expect also that consumer spending will be supported by gains in employment and incomes. We believe the stock market remains very attractive and that it will shake off its lethargy as the end of monetary tightening and moderation in inflation comes into view. Investment Policy Committee Alfred A. Lagan, CFA, Chairman Daniel A. Lagan, CFA, President May 23, 2006 This information is intended solely to report on investment strategies and opportunities identified by Congress Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell of any financial instrument. 2 Seaport Lane Boston, MA 02210 www.congressasset.com
|
|
|||||||||||||||
