Dear Paul,

For months, the business press has been saying the stock market was heading into a bear market.  But during the past few trading sessions both the S&P 500 Index and the Dow  Index have logged  historic record highs.  Why is the market going up?

THE ECONOMY IS DOING WELL

As I have repeatedly talked about in my weekly newsletters, in the short run, the stock market can often be out of sync with the economy, but in the long run, the stock market always follows the broad economy. This is what determines long-term stock market trends.

In the long run, if the economy is basically doing well, the stock market goes up. If the economy is substantially slowing and going into a recession, the stock market will go down following the long-term trend in the economy. That is really all one has to know in order to do well in investing. The rule is: FOLLOW THE LONG-TERM TREND OF THE ECONOMY. Be in the market when it is doing well. Be out of the market when the economy is substantially slowing down. It’s that simple!

Right now, the economy continues to do well. It is continuing to experience steady, if not spectacular, growth. Unemployment is low. Real wages are increasing. Mortgage rates are still historically low and inflation is moderate. The housing market, while still a problem, seems to be headed for a “soft landing.” All of this is good news.

WE MIGHT SEE PROFIT TAKING & A MAJOR CORRECTION-DON’T WORRY!

 However, as we see historic highs in both the S&P 500 INDEX and the DOW INDEX, don’t be surprised if there is a major correction soon as institutional investors lock in profits for the year. This is normal after a big run-up in the indexes, especially as we head into the historically two weakest months of the year for the stock market; September and October.

DON’T WORRY ABOUT THIS! So long as the economy continues to expand, this next correction will be a temporary blip and the market will recover later in the fall. Unless there is a major change in the economy, Foxhall will remain fully invested in its current models. We only take major defensive action in client portfolios by moving fully to bonds when economic statistics and our FOXHALL computer model indicates a major change in the economy that shows we are moving into a bear market or recession.

WHY IS THE ECONOMY DOING SO WELL?

LIQUIDITY:  In last Friday’s (July 13, 2007) USA TODAY, they interviewed one of our FOXHALL CAPITAL board of directors, Hugh Johnson, the chairman of First Albany. Hugh commented that many Wall Street institutional investors and hedge funds currently hold an enormous amount of cash which they are now putting to work. He told USA TODAY that “there’s enough money out there to drive both the economy and stocks.”

CONSUMER SPENDING:  High gas prices have yet to stop people from spending money. Better than expected June sales at Wal-Mart suggest that consumers, who drive the economy, still have money to spend.

GLOBAL ECONOMY IS BOOMING:  While the U.S. economy is good, the global economy is spectacular, growing at 2 to 3 times the U.S. economy. Global companies in the U.S. are benefiting from this international growth.

CONCLUSION

While we at FOXHALL CAPITAL expect a short-term correction between now and  October, barring some geopolitical crisis, we expect the stock market to climb higher by the end of this year.

Until next week…

-Paul Dietrich

dietrich@foxhallcapital.com