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Stock Market: Hope Springs Eternal

Stock Market News

June, 2009

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Stock Market: Hope Springs Eternal

With the Memorial Day holiday, Americans welcomed the return of spring--of warmer weather, blossoming branches, and longer days. Likewise, investment experts scanned the headlines and recent data looking for signs of economic rebirth and renewed optimism. The good news is the signs are there—but, as always, they are subject to varied interpretations. Cautious optimism is creeping back into analysts’ assessments. Here’s a synopsis of some of the trends and opinions influencing investment gurus.

Looking to the Fed
Mixed messages abounded in the recent minutes released by the Federal Reserve. The good news is that the Fed has revised its estimates upwards for the economic outlook for the second half of 2009 and for 2010. The bad news is that the Fed’s estimates for overall GDP contraction for 2009 proved to be too optimistic—the Fed now expects a rate of 1.3 -2.0 percent contraction as opposed to the 0.5 – 1.3 percent forecasted in January. This is somewhat offset by the Fed’s belief that data received after March suggests that the contraction in real economic activity is beginning to diminish. The Conference Board’s recently released Index of Leading Indicators shows a similar pattern of tempered optimism. The Index showed an increase of 1 percent in April—the first monthly increase recorded since June of 2008. The Board’s report suggested that the recession will continue in the near term, but that the declines will be less intense.

Reading the Signs
Those of us who don’t have access to a multitude of confidential data and surveys can look to our own benchmarks. It is a safe bet to assume that nothing will improve radically and stay that way, until the housing sector turns around. Check out real estate agent information to find out when the supply of unsold homes begins to steadily diminish. Likewise hiring information is a good clue, too. Often an economic upswing results in more jobs for temporary staff first, before solidifying into permanent job openings. A sustained increase in job postings online and in the classified ads lets us know that business managers believe that the worst is over.

History Lessons
History may not repeat itself, but a clear-eyed review of past events can help.

Many pundits continue to raid the history books to find parallels to today’s situation. Scaremongers point to the long (25 year) period between the market’s pre-Depression peak and the return of the S&P 500 to those numbers in 1954, but they are overlooking the many rallies that occurred in the interim. Markets don’t follow a straight line, and bear markets in the past all showed partial recovery periods as well as opportunities for buying and for realizing profits. Current data suggests we have the same opportunities now as in the post-Depression era. There have been two bull-runs in the last six months—rallies when the S&P 500 gained 20 percent or more. No one knows when the markets will return to their previous high points, but past evidence suggests that we will see a series of gyrations until we re-enter a bull market.

What does all this mean for the individual investor? First and foremost, it suggests the need for a disciplined investment strategy—one that steers clear of extremes –neither avoiding stocks or diving in desperately hoping to take advantage of a rally. Fortune favors the brave but rarely the reckless.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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