By Rick Glaze
The Dow Jones Industrial Average, an index of 30 large U.S. stocks, hit the magic number last week and the trumpet roared and the sirens rang out.
The magic number, it turns out, was a big integer with a lot of zeros. Hitting an all-time high last October was heralded, but it seems Americans are more enamored of round numbers - probably a result of the decimal-based number system we use. Remember, computers use a binary system based on 2 instead of 10.
The Dow Industrials pierced through the 13,000 mark in the face of a slowing economy and slowing corporate earnings. As you know from reading this column, the Federal Reserve Bank has raised interest rates aggressively in the past few years to accomplish this slowing. But interest rates are still low relative to the past. My first home mortgage was 12 percent, and now loans can be had in the mid-6 percent range.
First-quarter corporate earnings indicated a strong showing. The S&P 500 index, a popular market-measuring tool based on 500 U.S. stocks, finished 2006 with 14 straight quarters of double-digit growth. That streak will likely be broken this quarter, but not by much - growth in earnings should be between 7 percent and 10 percent.
Many factors can move the value of stocks up or down. Interest rate is a big one. Oil prices increasingly are a catalyst because of the stranglehold that foreign dictators enjoy as a result of undersized domestic supply. But the overriding reason that stocks go higher over time is growth in earnings.
Of course this growth typically correlates with general prosperity, creating jobs, higher salaries and all the rest. Earnings are expected to slow even more for the remainder of the year, which may put pressure on the Fed to lower interest rates, that is, if they don’t look at inflation prospects, which I will touch on in a future column.
Rick Glaze is president of Glaze Capital Management Inc. of Los Altos and General Securities Principal transacting through First Allied Securities Inc. For more information, e-mail Rick@Glazecapital.com.
