In the Meantime

As the stock markets work through jitters about a credit crunch and subprime, recent aggregate economic news has been very encouraging.

Evidence that fears of a credit meltdown are predominantly emotion based (and not fundamentally based) is getting clearer by the day. Even Wall Street firms are publicly signaling the credit market is stable and the vast majority of slated deals will still go through.

Betting on Mergers Can Pay Despite Widening Spreads
By Robin Sidel, The Wall Street Journal (*site requires registration)

It shouldn't be a surprise to anyone that the M&A game is risky and not for the faint of heart. Headlines about a few deals gone bad are perfectly normal—and it's also normal that the financial press will inflate the issue to proportions larger than reality.

We especially liked this quote from David Kostin today: "It is impossible even for a wizard like Harry Potter to reconcile two facts: Stocks cannot both melt down because the market fears financial institutions will have to fund and hold leveraged loan commitments while at the same time shares of target companies sell off on the belief the same transactions will not close."

It's simple logic, but we think it escapes most folks. It's reminiscent of the kind of market activity and volatility that points to a correction and not a new bear market.

In the meantime, things are looking pretty darn good for the economy. Here are a few recent headlines:

  • GDP for Q2 came in stronger than expected at 3.2%.
  • The PCE index, a measure of inflation watched closely by the Fed, rose 1.9% in June excluding energy and autos—benign and contained.
  • US 10-year Treasury yields are back down to 4.75%.
  • With over 300 of the S&P 500 companies already reporting, the ratio of upside surprises is 64%, well above the long-term average.
  • Consumer spending was up 5.2% in June from a year earlier. (The housing slump, now over a year old, was supposed to decimate consumer spending, wasn't it? What happened?) Even better, personal income gained a seasonally adjusted 6.1%.

While we're at it, today's tax situation—and the tax landscape looking ahead—is something every investor should know about. New taxes are something that truly can knock stocks. Today's Wall Street Journal features a cogent rundown on what could be ahead.

Tax Hike Scorecard
Editorial Staff, The Wall Street Journal (*site requires registration)

It seems like a lot, but don't head for the storm cellar just yet. Coincident with our 2007 theme of a do-nothing Congress, most of these taxes will never generate sufficient support to pass through both chambers, not to mention survive Bush's now active veto pen.

In sum, the economic and legislative environments haven't changed much this summer—it's still a benign world for stocks. Volatility is perfectly normal, and almost never as severe as it may initially seem. We note stocks in the US and globally are still positive for the year.

In the meantime, enjoy the summer while it lasts and stay bullish.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.