After last year's sparkling stock market and economic performance and the strong start to 2004, you might think this is as good as it gets.
Expectations for this year are rising. Estimates for the Gross Domestic Product are increasing along with estimates of total earnings for the stocks in the S&P 500. Recent economic reports provide plenty of good reasons for the increased enthusiasm.
Last week, for example, the New York Empire State Index compiled by the New York Federal Reserve Bank was at an all-time high, which was well above expectations. The Philadelphia Federal Reserve's equivalent survey of business activity and prospects was at its highest level since December 1993 and nearly double what it was in most months in the 1997-1999 period. The Philly Fed survey has been higher than the most recent reading on only 22 occasions of the 429 times the monthly survey has been calculated.
Despite the dramatic turn in the Philly Fed data and other economic reports, however, a key factor restraining the market from becoming irrationally exuberant is the nagging issue of employment.
Lurking beneath the headline report of the Philly numbers was the fact that the current employment component of the index fell from 19.4 to 17.5. The future employment index fell again and has declined 17 points over the last three months. The current work week index fell 3 points.
With mortgage refinancing activity waning and the initial surge of disposable income from lower taxes likely to ease later this year, employment gains are important if consumer spending is going to remain robust. There may be help coming.
Export prices lifted last month partly on the heels of the weaker dollar. American goods overseas are compellingly cheap, which is the obvious reason some European Union countries have discussed open-market moves to bolster the dollar's value.
The Philly Fed report included the fact that 58.2 percent of the firms surveyed expect to increase capital spending in the next six to 12 months. Capital measured by the Philly Fed's index already has increased notably over the past three months. Increases in capital spending and exports could help bolster employment roles significantly.
The cliche, "Everything comes to those who wait," comes to mind.
Now that the market and the economy are well above their bottoms, it might be natural for investors to be a little impatient by wanting everything to fall into place quickly. The 1998-2000 era, however, produced dramatic excesses that need time to be worked off. Considering the amount of time that has passed since we reached the economic nadir late in 2002 and the irrational market and economic activity that led to the economic doldrums, expecting a quick fix to all economic issues is irrational.
It is rational, however, to expect this week's barrage of earnings reports to be good. Some might qualify as being stellar.
IBM's report last week probably fell into the stellar category. The company surprised everyone by reporting earnings five days ahead of schedule and six-cents-a-share higher than anticipated.
With the market closed Monday, no earnings reports are scheduled. Tuesday, however, begins a flow of 338 reports scheduled for this week. The merger of J.P. Morgan Chase and Bank One may increase attention on numerous bank reports due this week, led by Citigroup's report before Tuesday's market opening.
Worries about the employment situation and that good earnings may have been fully discounted provide a healthy degree of skepticism. Expectations clearly are much higher than they were a year ago, but you owe a debt of gratitude to the doubting Thomases. The fact that they have concerns helps to keep irrational behavior to a minimum.
You can start to worry once it appears that everything is thorn-lessly rosy.
We are not there yet.
Gregory M. Drahuschak is first vice president of Janney Montgomery Scott Inc., Pittsburgh.
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