- Summary: Many money managers and analysts are optimistic about the rest of 2006, while acknowledging there are some hurdles that must be overcome. The article looks at five key areas: 1) The Fed — has it finished raising interest rates? Key indicators such as Core CPI, consumer spending, and Q2 growth seem to indicate inflationary pressures have relaxed. But underlying inflation remains elevated. 2) Housing — will it drag the markets down? Housing-related bonds are the single biggest part of the bond market. Housing market measures are currently down 10-20% from their highs. Banks warn of profit cuts due to mortgage defaults and falling initialization. But dropping lending rates in anticipation of Fed cuts (see 1) could signal an end to the current slump. 3) Oil prices — where are they headed? Crude is up 13% on the year but down 10% from its highs. High oil prices reduce consumer spending and economic growth. 4) Elections — what impact will they have? Stocks tend to bottom in the months before congressional elections and begin a sustained rally: Since 1950 stocks have averaged 30% gains in the 12 months following Q3 of the congressional-election year, and have never declined. These worries could mean a jittery September, but once investors adjust to the electoral outcome, markets could rally. 5) September — bad things often happen in September. September is the only month in which the Dow industrials have, on average, declined noticeably. Where we stand: The DJIA is ahead 6.7% since mid-July. It is currently at three-month highs, and less than 260 points from its record close of 11722.98 of January 2000.
- Comment on related stocks/ETFs: Breaking down economic components gives the appearance of making them easier to foretell. But none of the factors exist in a vacuum, and each argument invites a counter-argument. One example: Will continuing high oil prices push the stock market down due to high production costs and reduced consumer spending, or will they drive it up as reduced spending and economic growth allows the Fed to cut interest rates, making the stock market a more attractive investment? In a related article, Barron's asked 12 leading analysts for their predictions about what the rest of 2006 holds in store. In our "Quick comment" you'll find links to many of SeekingAlpha contributors' bold forecasts.
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