Financial Watch

The first trading week of 2006 turned in a strong performance as the major market indices all registered strong gains. For the week, the Dow Jones was up 2.3%, the S&P 500 rose a healthy 3%, and the NASDAQ turned in gains of 4.5%. Strong gains during the first week of a new year are not atypical, but positive news on employment growth and more indications that the Fed is nearly done raising interest rates sets the stage for a strong January. On the surface, payroll growth of only 108,000 would appear to many to indicate weak economic growth. However, slower employment growth sends a signal to the Federal Reserve that its campaign to slow down the U.S. economy is working. The Federal Reserve will meet at the end of January to raise interest rates another quarter point. It is possible this will be the last hike for some time. Minutes from the Federal Open Market Committee’s (FOMC) last meeting indicate concerns are growing about over tightening. Further signs of a slowing housing market reinforces our view short-term interest rates should not go much higher.

Whether the FOMC will stop raising interest rates after its next meeting or drag out its campaign to slow the economy slightly longer is almost inconsequential to stock market participants. Expectations are growing that the Fed is almost done and historically speaking this typically leads to a strong market rally. Financial Watch believes this past week was just the leading edge of the rally.