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The earnings reporting season is in full swing now with a quarter of S&P 500 companies reporting this week.  The results were quite good on balance as numerous companies soundly beat analysts’ estimates.  Those companies beating analysts’ estimates span a broad range of industries.  They include Caterpillar, SanDisk, Boise Cascade, Georgia-Pacific, Bank of America, Merrill Lynch, USA Truck, Marriott Int’l, Coca Cola, Ford, Johnson & Johnson, Stryker, New YorkTimes, and BB&T.  The list of companies surprising negatively is much shorter.  But it includes some notables like Kraft Foods, Fannie Mae, FleetBoston, Hershey Foods, Sears, and Microsoft.  

On Wednesday the Federal Reserve policymakers did something they rarely do.  They cut rates even while suggesting the economy is improving.  Furthermore, they suggested they do not plan to tighten policy (raise rates) to preempt a potential burst of growth.  The Fed cut the benchmarkU.S.interest rate to a 45-year low of 1% to boost economic growth and prevent further slowing of inflation.  Their statements and actions suggest that rates will remain low, even fall further, for an extended period of time.  Basic economics suggests that as businesses and investors begin to accept that low interest rates are here to stay, they will begin investing in longer term and riskier projects to create economic growth.  But we know the major problem facing investors and business leaders today is a lack of confidence.  The latest cut is an attempt by the Fed to show that they are willing to do what is necessary to reinvigorate economic growth. 

Early this week investors were treated to a very nice surprise when the Federal Reserve reported that manufacturing in New York State expanded considerably more than expected this month.   Orders and sales grew the most since January, bolstering expectations the economy will accelerate in the second half.  The DOW rose 202 points as investors said the report may foreshadow a strengthening in U.S. manufacturing, which contracted from March through May.  The New York results prompted Bear, Stearns & Co. and Lehman Brothers Inc. to raise their forecasts for Thursday's Fed report on factories in the Philadelphia area according to Bloomberg.

During the next two weeks, as the second quarter comes to a close, we will hear from those corporations who wish to better prepare their shareholders for the actual results they expect to report later in July and August.  The ‘pre-announcement’ season is typically used by corporations to soften the blow of bad earnings news.  Pre-announcements can be vague and, therefore, cause a less a dramatic impact on the stock than the reporting of actual results might.  At this point the companies themselves don’t know their final results, so they must be somewhat vague.

In nine of the last ten trading days the S&P 500 index has increased.  While two weeks is not a market trend, as the market is random in the short-term, it surely makes people feel better.  On the anecdotal side, my conversations with clients, friends, and business associates have unanimously confirmed a growing optimism about the economy.  Government statistics remain mixed, but are showing signs of improvement. 

The S&P has risen five of the past six days or 3.3%, as investors demonstrate more optimism about this country’s economy.  Investor optimism continued to be fueled this week with several positive economic reports.  The first came on Tuesday as the Conference Board reported that consumer confidence in theU.S.rose in May to its highest level in six months.  The confidence index rose to 83.8 in May from 81 in April, the second consecutive monthly increase as energy prices fell and the stock market rose.  An index in the report that measures consumers' attitudes about conditions six months from now rose from 84.8 to 94.4, the highest level since September of last year.  

Today, assuming the Senate does as expected and passes the $350 billion tax cut bill, the campaign for theU.S.presidency in 2004 unofficially begins today.  The health of this economy will make or break Mr. Bush’s re-election bid for the presidency.  His father learned just how fast his huge popularity after the Gulf War dissipated when voters were made to feel that their pocketbooks were threatened by a weakening economy. 

It has been easy to focus on the numerous hurdles our economy has endured over the past several years and to assume that new ones will continue to manifest themselves, keeping us in the doldrums.  But, what if things started going right, or even mostly right, for the next several years?  One might argue that conditions have never been better in history for growth than they are today. 

Have you noticed that the stock market is doing consistently better in spite of the continuing dreary economic news?  One reason is that we have largely escaped the first quarter earnings cycle without a single major blowup or negative surprise; corporate earnings are coming in better than expected.  What’s more, analysts have shown no signs of cutting their second, third, or fourth quarter earnings estimates. 

These days, pretense doesn’t enter the equation when people talk about their money, their livelihood, their personal well-being or that of their families.  I’ve had many a “heart to heart” with clients and friends on just those subjects over the past several months and I’m sure you have too.  People have been scared economically and physically for what seems like a very long time.  Household budgets are tight, jobs are scarce, and people seem to be hunkered down.