Still In Flight

Back in November, we provided a list of worries keeping overall sentiment cautious about the economy (see our past commentary "Skyscraper of Worry" for the full list). Everything from a housing bubble to high energy prices to the collapsing US dollar to trade deficits were going to drag us down into a recession. While our list of over twenty worries seemed like a lot, it was really just what we could think of off the top of our heads. There were surely more.

One of the biggest worries was the notion that the economy would have a "hard" as opposed to "soft" landing in 2006. We argued there would be no "landing" at all. (See our past commentary "The Flying Economy"). Conventional wisdom held that yes, the economy must be slowing and it was only a question of whether or not we'd survive through it.

Well, the numbers are in, and it's not pretty for the naysayers. US 4th quarter GDP climbed a seasonally adjusted 3.5% annual rate—up from a 2% pace in the third quarter. This easily beat consensus forecasts—and that's after many economists had already ratcheted their forecasts upward.

The US economy is still in flight, and accelerating. 2006 GDP is going to come in at about a 3.4% growth rate compared to 3.2% in 2005. No signs of a "landing" here. Couple that with robust corporate earnings (see our commentary "Consistently Too Low, Again") and undervalued stocks (see our commentary "Flip it to See Stocks' Value") and it's all adding up to a bright future for equity investors.

U.S. Economy Grows 3.5%; Inflation Gauge Falls Sharply
By Jeff Bater, The Wall Street Journal
https://online.wsj.com/article/SB117024981981793612.html?mod=home_whats_news_us

Most of the reaction we saw this morning is either skeptical or just flat out stunned by the news. There are a lot of words like the economy "defied" expectations; economic "resilience" and "strength" was "surprising," and so on. Here's a sample of economist reaction to the news:

'Economy Busted Out' In the Fourth Quarter
The Wall Street Journal
https://online.wsj.com/article/SB117025199556793641.html?mod=home_whats_news_us

The US economy is robust and still in flight, the global economy is strong, stocks are undervalued, and all major worries are priced in. The fundamentals are there—it's only a matter of sentiment catching up to reality. Will it be a good year or a great year for stocks? Either way, equities are the place to be.