Market Still Rising

This is the stock market calculus at the moment. If interest rates don't go up and corporate earnings stay strong, then life is very, very good.

I think they have it half right: interest rates may not go up, but corporate earnings will not stay strong. I think yesterday's report on retail sales and PPI showed why. The Fed has successfully navigated the inflationary pressures of oil and a booming housing market. They held off future hikes in the hopes that moderating oil prices as well as falling housing construction demand would lessen the CPI. And I think it's working. The biggest component of inflation is consumer wages and there is pressure there, but it is offset by falling costs of goods.

As anyone who follows the concepts of the business cycle, the classic signs prior to a recession are hiring strength and wage pressures as production and prices start to fall. And that's where we are.

Where I think the market is wrong is that they ignore the flattening sales while still expecting corporate earnings to be strong. It is possible for companies at this stage to maintain strong earnings in the face of retreating sales. All they have to do is squeeze their vendors and the margins look great. That will probably be the case into the Summer - softening sales but strong earnings.

So I am wrapping up my stock review - I am concentrating on stocks that will show both strong sales and strong earnings growth. Like UCTT (which is up almost 10% since we were stopped out).