Stock Market:
Back to Focusing on the Economy

By Alexander Paris
The Alexander Paris Report

       There was a significant change in investor sentiment in the last half of May. Investors suddenly lost their concerns about the soft patch in the economy while also getting more comfortable with the inflation outlook. Helped by more good economic news, the market finished the month with its second well-balanced gain. All major averages were up around 1%, with technology carrying the Nasdaq 1.43% higher in what looks like a potential sustained catch-up rally and new leadership in tech stocks.
        Encouragingly, the small-cap stocks also outperformed the majors in the last few weeks of May. Combined with the new tech leadership, these are signs of improving investor confidence and perhaps evidence the sideline investment money is coming back into the market. The fact that the top five performing averages lately have been small cap or the tech-led Nasdaq is also a sign that investor psychology is switching from safe assured returns to more aggressive opportunities. The same was generally true for the relative sector performance. The best gainer among the S&P sector in the last week was energy, followed by IT and telecom. On the other hand, most of the worst performers were defensive in nature. So it looks like investors are heading into June with a positive outlook with a good chance that the current rally can be sustained.
        With all the concerns this year about the economy and inflation, ironically we may finally be starting into the second leg of the bull market triggered by investor realization that economic growth will be slow while inflation and interest rates will all be slowly rising together. That isn't bad, only normal. While some of the potential ill effects of today's excesses should be a cause for concern, at the same time they are no reason to get frozen into inactivity because there may be a big bust. Investors seem to be learning that lesson. In truth, most historical U.S. excesses, especially in the postwar years, have been worked out over time, helped by free market adjustments and a healthy overall economy. As noted elsewhere, the government cannot usually avoid the ultimate correction of excesses it creates but it can determine the shape of it. It can also commit policy errors that can make them worse. So far, the current government has been handling the oil price surge in a much better manner than the big errors made 25 years ago. While there is great fear of foreign dumping of U.S. securities, in truth a number of countries have already been quietly diversifying the reserve holdings.
        Editor's Note: Alexander Paris is editor of The Alexander Paris Report, 161 N Clark St., Ste. 2950, Chicago, IL 60601, 1 year, 12 issues, $195. Mr. Paris is president of Barrington Research Associates, a brokerage firm that provides economic and investment research to institutional investors.