Since our last Brief a couple of weeks ago, inflation has taken center stage as the new hand-wringer.  On March 2nd oil blew through its most recent high of $52.88 reached on October 26th.  It now stands at $56.62 per barrel.  But the economy seems relatively unfazed.  That is until recently.  It now appears that businesses are beginning to pass along their commodity and labor prices to consumers.  On Tuesday, Greenspan seemed to confirm what many had been worrying about for months; that inflation is creeping back into the economy.

The economy continues to show signs of strength and expanding breadth.  Consumer spending, which represents two thirds of our economy, has been the steady sustainer since recovery began in late 2001.  Low interest rates and taxes have provided consumers with more spending power.  Not until the second half of 2004 did the corporate sector join the party, but it is coming on strong.  Most recently business investment has grown at the fastest pace since 1997.  It will likely take a leadership position from here as the consumer shows signs of slowing somewhat.

Yesterday, Federal Reserve Chairman Alan Greenspan appeared before the House Financial Services Committee.  His prepared remarks were identical to those he gave the Senate Finance Committee the day before, but his responses to members’ questions were particularly candid and enlightening.  Here are some of the highlights of his remarks on topics that most directly affect long-term investors.

President Bush was in town yesterday conducting a town-hall-styled meeting to further explain his plans for a Social Security overhaul.  His aim is to provide workers with better growth than the current system’s performance, thereby generating more income at retirement.  A further advantage is the potential to pass any remainder along to heirs.  His plan obviously faces huge hurdles as many in Congress don’t believe there is a significant problem and others feel it can be fixed with less dramatic changes.  It is the President’s hope that he can remove much of the political fire from the discussion to have an honest and open discussion of options to improve this mammoth government program.

There’s a stock market axiom that says, as January goes, so goes the year.  According to Bloomberg, since 1950, the S&P 500 has moved in the same direction during the year as it did in the first week 73% of the time.  The S&P 500's drop so far this year marks its worst start since 1990, when it fell 4% in the period through Jan. 20th.  The index lost 6.6% that year.

The U.S. economy forges on, adding jobs and improving standards of living.  It was reported today that the unemployment rate fell from 5.4% in December to 5.2% in January, a three-year low.  According to Bloomberg News, the latest revisions show that the level of now exceeds those of February 2001, a month before the world’s largest economy fell into an eight month recession. 

Earnings season customarily brings stock market volatility and this one is certainly no exception.  As oil prices rise creeping toward their record highs and as several major U.S.industrials warn of earnings shortfalls, the good news has largely fallen on deaf ears.  The Dow Jones Industrial Index declined nine of the last twelve trading days for a 3.2% drop from year-end highs.  The NASDAQ is down 5.5% during a similar period.  Investors seem more cynical in January than they did in December when they chased the Dow up 11% for the month.     

The professional future-tellers, the highly respected economists and analysts who have been glamorized in recent years by CNBC, CNN, and Bloomberg News all fall in a pretty tight range saying that markets should grow about 8-10% this year, the economy should grow about 3.5% and corporate earnings, about 10%. 

So far the Holiday spending season is outshining the more pessimistic prognostications of the more Scrooge and Grinch-like analysts.  On Monday the government reported that retail sales rose for the third straight month, despite rising fuel costs.  The end of the negative political ads, the highest job growth since 1999, and the recent drop in gasoline prices have all likely contributed to the improved mood and spending.