Foundation Forming, Base Building

Before things can get better they have to stop getting worse. We have talked about some of the very early signs that the economy is starting to turn.We have also seen bond and credit markets improving from last fall. But as corporations have begun to report 1st quarter earnings, these reports will be mixed at best. This week a full quarter of the S&P 500 companies report earnings, so expect a few clunkers in the batch.

The initial earnings reports have been slightly better than expected, especially for the banking stocks. Low interest rates, improved mortgage activity, and cost cutting are helping the banks heal their balance sheets. There are still problems, however loan losses are still increasing and high unemployment means this trend will not end soon. Even with some continued bad news coming out, we believe we are one-third of the way to building the foundation for a gradual recovery by the last quarter of 2009.

A lot of the “green shoots” we see in the economy and the better-than-expected company earnings are confirmations that things have stopped getting worse. The economy literally fell off a cliff last fall, and corporate earnings have fallen dramatically across all sectors the last few quarters. Remember, the market sell-off during the credit crisis last fall was the most severe since the Depression. The economy is fighting the worst recession in decades and corporate profits and dividends have fallen more than they have in decades. It appears we have stopped falling but we are still a ways away from growing again. Expect more volatility in the markets during the weeks ahead.