Good Start for the New Year

They say on Wall Street that the year goes like January goes, and January goes like its first trading day.  Based on this observation and a great first day of the year, we should be all set for 2011.  Of course, this didn’t work for the last two years — markets rose despite poor January in each of the years.  But I am not a scholar of calendar anomalies, so let’s instead look at the fundamentals.  And they continue to be positive.  Consider:

– Consumer sentiment and spending continue to improve.  Even luxury items and cars show significant increases.  This bodes well for GDP in 2011.

– For the first time in three years, first-time unemployment claims dropped below 400,000, which is considered a “magic number” by many economists.  If first-time claims are below this threshold, real job growth becomes very likely.

– Corporate earnings and fundamentals are very strong, as evidenced by positive surprises in earnings reports over the last several quarters.

– Stock valuations, while near historical averages, are very attractively priced compared to bonds based on earnings yield.  It becomes more and more likely that investors will start to abandon perceived safety of bonds and transfer their assets to equities.

As always, not everything is all roses.  Investor optimism is quite high, which is a negative contrarian indicator.  Housing market is stubbornly depressed, as index of home prices fell recently.  We will of course have setbacks, but overall I believe that positives will prevail, and I look forward to a prosperous New Year.