A reader suggested that I try a question and answer format in my column. Here you go!

Q: Is the economy improving or are we in for more recessionary times?

A: It looks like we are at or near the end of the recession. The stock market tends to anticipate recoveries and recent performance suggests that the recession will end soon. Other indicators agree. Business inventories have shrunk dramatically. Businesses are spending again and more hiring should follow. The Gross Domestic Product was only slightly negative in the second quarter and much better than prior quarters. New home construction has picked up and consumer confidence and spending are improving.

Q: Will we see massive inflation as we spend our way out of the recession?

A: There is little question that our huge government deficit, weaker dollar, and increase in oil and other commodity prices could lead to inflation. The Federal Reserve monetary policy of flooding the economy with cheap dollars could support the inflation scenario; however, I don’t see the double digit, 1970s & 1980s levels of inflation. If anything, we might see deflation (the reduction of prices) for the next 12 months or so. Wages are not growing. Interest rates are low and should remain low for the near future. The spending on military items should decline soon. Hiring is weak now and will only increase gradually. Oil prices are rising, but people are driving less and have more fuel-efficient cars. All of these factors should help keep inflation at a modest rate.

Q: Will mortgage interest rates stay low?

A: Mortgage rates have hit their low and started to rise — gradually. However, mortgage lenders are hesitant about making bad loans again. Even though rates will remain relatively low, it may be harder to qualify for mortgages now and in the future. The larger banks are hoarding cash. You can’t blame them for holding back. They have gone back to fundamental lending.

Q: Will the stock market keep rising or will there be a retest of the March 2009 lows?

A: Great question and no one knows the answer. After two terrible months at the beginning of the year, the market has come roaring back. As of last week, the S&P 500 was up over 9 percent year-to-date. Foreign stocks have done even better, supported by the weaker U. S. dollar. Most evidence suggests that the U. S. stock markets should continue to do well. Housing starts are up, unemployment rates are slowing, corporate productivity is improving, and corporate earnings are generally up.

A retest could happen, but probably not to the lows of March. If the markets do pull back, it may not be all bad. The rapid rise over the last five months is staggering and that rate is not sustainable. Don’t get me wrong. I like the improvement, but I’m a realist. Barring some unexpected events, I suspect the markets will be higher by year end. 

Let me know if you like this format or if you have questions you would like me to address.

Mills is a registered investment adviser and certified financial planner. Contact him at 1030 Seminary St. Ste. D, Napa , 254-0155 or suntrm@aol.com.