The Value Line Investment Survey

ECONOMIC AND STOCK MARKET COMMENTARY

The economy is limping along as the arrival of spring draws near. True, not all of the news is downbeat. For example, recent weeks did see a selective moderation in housing’s decline, with homebuilding actually edging higher and with home resales falling less than expected. For the most part, though, the news is dour, with sales of new homes continuing to fall, while the decline in housing prices is picking up speed. Moreover, consumer confidence is at a five-year low and sales of consumer offerings, such as computers, are easing. The overall backdrop is sufficiently weak, therefore, to suggest that the current quarter will show little, if any, gross domestic product increase. In fact, a dip in GDP would not surprise us.

An acceleration in growth is nowhere in sight.The sluggishness along the business front is now so widespread to suggest that there will be little, if any, pickup in the second quarter. A recession, in fact, remains possible. Thereafter, a likely further drop in interest rates (as the Federal Reserve moves to reduce borrowing costs in the months to come) along with the arrival of the government’s rebate checks may give the economy a mild boost later this year. We think the business backdrop will strengthen a bit further in 2009.

Economic growth isn’t all that is on the minds of investors.They also are concerned about inflation, which has been accelerating in recent months, under pressure from higher food, energy, and prescription drug prices. We think this upward trend in prices will moderate in the near term, as there may be sufficient economic sluggishness around to keep serious demand and pricing pressures at bay.

Growth, rather than inflation, is likely to be the focus of the Federal Reserve in the near term. This is the main reason that we think borrowing costs will fall in the months ahead. However, we note that as economic growth firms, inflation may become more of a problem. To help prevent this, we think that the Fed may start raising rates rather quickly by next year. Such a scenario probably would put pressure on stocks. For now, though, rates seem headed lower and stocks could well be headed higher.

Conclusion: We think equities are priced attractively enough at a time of falling interest rates for the market to do fairly well in the months to come. Please refer to the inside back cover of Selection & Opinion for our Asset Allocation Model’s current reading.