Don’t Let Volatility Overshadow Positive Fundamentals

Through the first quarter, the S&P was essentially flat, highlighted by a minor correction in late February. Since then, the market has rebounded to record highs. Despite this volatility, we encourage investors to be patient and review certain positive fundamentals.

Investors should take solace in the following: (1) Corporate earnings are expected to grow at least 6 to 7 % in 2007. (2) Abundant cash on corporate balance sheets and in private equity firms should continue to fund M&A activity and stock buybacks, both positive for the market. (3) The P/E multiple on the S&P 500, based on forecasted 2007 earnings, is a very reasonable 15x.

We still believe that 2007 is a transition year from an economy growing at an above trend rate to one that is growing a slightly lower rate. This is not all bad. A slowing economy tends to reduce the pressure on inflation and interest rates. However, it does mean that not all companies will be delivering double-digit earnings growth.

With a slowing domestic economy, now may be a good time for investors to review their allocation to international investments. The global economy is growing faster than the U.S. economy and there are numerous strategies for taking advantage of this. Although one must be selective, it should be noted that earnings growth in emerging markets is trending 14% versus 9% in developed markets.

© 2007 Childs Company