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First-quarter earning reports look good

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The U.S. economy continues to rebound. The latest employment statistics paint a picture of a robust recovery in jobs. Payroll employment rose 288,000 in April and has risen by 867,000 over the first four months of the year.

The gains are coming across a wide range of industries pointing to a broad-based economic recovery. The unemployment rate fell back to 5.6 percent in April and, I think, is likely to move sharply lower over coming months. Also, the median duration of unemployment (the average time a person is unemployed) dropped sharply to 9.5 weeks.

On the earnings front, the first-quarter news is also good. With 410 companies reporting (out of the S&P 500), earnings are up 25.8 percent, which, according to Thomson First Call, is the largest earnings surprise (for Wall Street analysts) on record. I expected to see strong earnings, and I remain optimistic that company earnings will remain robust throughout 2004. The earnings recovery (already at new record highs) will add more fuel to the economy. Companies can increasingly shift their focus from cost cutting back to rebuilding inventories, new capital spending and hiring -- as already reflected in the strong jobs reports.

I see three main areas of concern.

First, there is Iraq. As we all know, the quelling of the insurgency has not gone well. We are all worried, but I do not see this as having much impact on the economy.

Second, there is oil. Crude oil prices have soared to near $40 a barrel, while OPEC talks about again cutting production. This does hurt and I think oil prices this high are highway robbery, but the damage should be limited.

Finally, the rebound in interest rates has knocked down bond and other interest rate sensitive security prices. But this is the price generally paid for a strong rebound in the economy and a shift from price deflation back to modest inflation. I do not see this as a major threat to the recovery, just part of the process.

I must say equity markets lately have been less optimistic. Year-to-date, the Dow is down 3 percent and the S&P 500 is down 1 percent, despite all the good economic and earnings news. The silver lining is that weak prices coupled with strong earnings means that company price to earnings ratios (a fundamental measure of risk) are moving sharply lower. Going forward, I am optimistic that strong fundamentals will outweigh the risks and the market advance will resume.


Wilsey is a registered principal with Linsco/Private Ledger, a member of the SIPC. "Smart Investing with Brent Wilsey" can be heard Saturdays at 8 a.m. on KFMB AM 760 and Tuesdays at 12:30 p.m. on Channel 8 news. Contact him at brent.wilsey@sddt.com.

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