Market Week in Review

S&P 500 1,139.32 +.63% for the week.

U.S. stocks finished mostly higher on the week as stellar corporate earnings and economic reports were offset by rising energy prices and violence in Iraq. Yahoo!(YHOO), Dell(DELL), General Electric(GE), Genentech(DNA), Research in Motion(RIMM), Cummins(CMI), Black & Decker(BDK) and Cigna(CI) are notable U.S. companies that raised their revenue or earnings guidance. HMO's paced gains for the week as Cigna's strong quarterly report and Oxford Health(OHP) takeover speculation ignited investor interest in the group. The all-time high reading in the ISM Non-manufacturing Index and three-year low in initial jobless claims both painted very positive pictures of the current state of the U.S. economy, thus leading to further strength in commodity-related groups. Finally, small/mid-cap security-related stocks soared as traders speculate demand for their products from government's around the globe will significantly increase on terrorism fears.

With strong economic growth comes increased demand for energy. Crude oil rose 8.3% for the week, its strongest rise in over a year. The very strong economic reports also resulted in speculation that the Fed was falling behind the curve with respect to inflation. This prompted further selling in Homebuilders as investors bet interest rate increases will dampen demand for homes. Retailers also underperformed last week. Rising gasoline prices, harder year-over-year future sales comparisons and declining monetary stimulus all led to weakness in retail shares. Violent headlines from overseas also contributed to a lackluster performance for U.S. stocks. The very positive economic and corporate earnings reports were drowned out by the media's intense focus on all that could go wrong in Iraq.

BOTTOM LINE: It is my optimistic opinion that the burst of violence in Iraq in temporary in nature. This is giving investors a chance to buy U.S. shares at artificially depressed levels. Numerous bell-weather U.S. companies are beating estimates by a significant margin, thus making current valuations even more attractive. Inflation is not currently a problem and won't be for the foreseeable future. Only 5% of inflation is comprised of commodity prices. 70% of inflation comes from unit labor costs. There is still too much slack in the labor market to see any significant pick-up in unit labor costs at this time, thus allowing the Fed to increase rates at a slower pace than most investors currently anticipate.