Stock value goes up when earnings increase and inflation and interest rates decrease. VectorVest also encourages investors to buy stocks when the market is rising from low points. Therefore, we track data regarding the key factors of earnings, inflation, interest rates, market performance and investor sentiment. A factor, such as CPI inflation, is deemed to be in a favorable mode when its trend indicator is above 1.00. Readings below 1.00 are, of course, deemed to be unfavorable. This information is documented each week in the Climate Section of these Views.

The Investment Climate is deemed to be favorable when the Composite of the trend indicators is above 1.00. With a Composite reading of 1.07, the Investment Climate here in the U.S. is currently deemed to be favorable. More information on each of the investment climate factors and their corresponding trend indicators may be found by clicking on Help, selecting VectorVest OnLine Help, clicking on Index, entering the letter "I" in the lookup box and selecting Investment Climate. (VectorVest ProGraphics v6.0 has slightly different selections.)

You may also see graphs of each factor and its corresponding trend indicator by clicking on Graphs in the Main Tool Bar and clicking on Market Climate Graph. When viewing the graph of the U.S. Investment Climate Composite, it is interesting to note that it bottomed at a very unfavorable reading of 0.78 in late 1999, early 2000 when the economy was strong and stocks were terribly overvalued. It peaked at 1.29 on 12/21/01 when the economy was weak and the value of the VectorVest Composite was near its ten-year low. Since then, it bottomed on 06/18/04 and has been hitting higher lows and higher highs. What does this imply?

At face value, it means that the economy peaked two years ago and has slowly been getting weaker. Falling inflation and interest rates are the result of a weakening economy. The CRB Inflation index has fallen 16.8% from its 05/12/06 peak and the yields on T-Notes and AAA Corporate Bonds have been falling for four months. It is also worth noting that the combination of earnings, inflation and interest rate trends changed last week from a Case 4 Bull market scenario to a Case 3 Bull market scenario. As of tonight, we have moved to a Case 2 Bull market scenario, in which we have the much desired soft-landing, Goldilocks scenario in which stock prices should soar. However, there is still a possibility of going to a hard-landing recession. To see what happens, stay tuned to The Investment Climate.

P.S. While this essay addresses the Investment Climate of the U.S. stock market, the same detailed analysis is done for VectorVest Canada and VectorVest Europe using appropriate country specific factors.

P.P.S. Next week, I'll discuss the Truth Chart and explain exactly how we determine the various Bull and Bear market scenarios cited in each database.