Although Wall Street rebounded strongly and posted a three-month rally from March to May after raching 12-year lows March 9, analysts expect the U.S. equity market to be boring in the second half of 2009.
According to media reports, investors have snapped up stocks recently on speculation that the beginning of the economic recovery is not far away.
U.S. Federal Reserve Chairman Ben Bernanke said in April that "green shoots" were showing up on the economic landscape "as some confidence begins to come back."
Are the economy's "green shoots" real or imagined? Compared with expectations earlier this year, investors seem more optimistic as oil prices retreated to about 35 U.S. dollars a barrel in February and the banking sector and consumer confidence showed improvement.
U.S. stocks started to rebound on good news from the battered banking sector. Bank of America's Ken Lewis, JPMorgan Chase's Jamie Dimon and Citigroup's Vikram Pandit are among CEOs saying their banks were in the black early this year.
The U.S. government in May reassured investors, saying that 10 of the top 19 banks will need to raise a total of 74.6 billion dollars in capital over the next six months, less than what some analysts had estimated. Also, some banks have been able to repay government money they took last fall after the Lehman Brothers bankruptcy threw the financial system into disarray.
U.S. Treasury Secretary Timothy Geithner said "the financial system is starting to heal."
Meanwhile, Alan Valdes, vice president of the Hilliard Lyons investment firm, credited a drop in oil prices with spurring the economy.
"Remember last summer it was the housing market that got into that mess, but it was oil that exasperated it. When oil was 140 dollars a barrel, that squashed the American public," Valdes said.
The decline in energy prices will lower living costs and enable consumers to start spending again.
Meanwhile, a batch of economic data suggests there is an increasing number of favorable factors in the economy. Pending home sales have been rising since February and house prices have declined at a lower pace, raising hopes that the market has bottomed out.
In addition, while the U.S. unemployment rate climbed to a 25-year high of 9.4 percent in May, it was not as bad as some analysts had estimates.
However, investors have grown nervous that the rebound won't be as robust as they had envisioned.
"We are still not out of the woods and there are lots of uncertainties. The market doesn't like uncertainty," said Theodore Weisberg, president of Seaport Securities.
This fear has put a dent in the three-month advance that saw stocks jump more than 30 percent from 12-year lows in early March.
Now the question is where will the stock market go in the second half of this year?
"It's quite possible that the market will not go down and make new lows as somebody is saying, but also it is not going to go back and make new highs," Theodore said. "We can expect that the stock market will be boring."
Alan was more bearish, warning that "the year is going to end down." He thought the market will likely to either trade sideways or test the lows because "the picture is not that bright."
First of all, the unemployment rate in the United States was expected to reach 10 percent in the days ahead. High unemployment can have a ripple effect on the economy, making a bad economy even worse because it changes consumers' spending habits and makes them keep expenses on a tight rein.
Although economists point out that while the pace at which Americans are losing their jobs is decreasing, the large number of people looking for work or not working enough hours remains a serious problem.
"Even though it has stabilized, there's still no one hiring. That's the problem," Alan said.
Meanwhile, there is no spike in the housing recovery. On the one hand, housing prices cannot go back up while unemployment remains high. On the other hand, mortgage rates are more than five percent right now, much higher than the desired four percent, and are stifling the market.
In addition, oil prices have doubled to nearly 70 dollars a barrel as the second half of 2009 starts. That could dampen any improvement in consumer spending.
"We're concerned that a rapid increase in oil prices may have a negative effect on the economic recovery," said Nobuo Tanaka, executive director of the International Energy Agency.
Last but not least, although the market is trying to shake off concerns about the financial sector, bad assets caused by subprime loans still weigh on the balance sheets of some financial firms.
Investors' sentiments face strong headwinds from these troubles and caution is in order. For the market to continue its upward march, investors need to see something more concrete.
Given that the economic recovery unlikely will be dramatic, traders don't think the equity market will be very exciting in the second half of the year.
Source:Xinhua
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