- We continue to believe a late-year rally for stocks will fulfill our long held outlook for modest single-digit gains on the year for the S&P 500.
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Unfortunately, all of the potential catalysts are a month or more away while the economic data continues to disappoint.
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In the meantime, we continue to find yield-producing investments attractive, including High-Yield Bonds, which offer investors a return while waiting out the volatility in the stock market.
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- If history is any guide, the disappointingly soft economic data over the past few months may soon begin to firm.
- Looking back over the past 60 years, about one year after the start of every recovery a soft spot emerges.
- Some closely watched indicators of growth are likely to be near the bottom of their typical soft spot-driven decline and poised for a rebound.
- As the data begins to firm in the coming months, the stock market may mount a fourth quarter rally achieving the modest single-digit returns we have forecast for 2010.
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- In the first quarter, the markets were focused on a slowdown in China, in the second quarter the concern moved to a slowdown in Europe, and in the third quarter the growth scare has shifted to the United States. In each of the prior quarters, markets made their low at the midpoint of the quarter as a policy announcement turned the tide on investor sentiment.
- It appears that the Fed missed the opportunity to turn sentiment around with their mid-quarter policy announcement last week. Without a potent policy driver, the fear surrounding the U.S. outlook may not dissipate as quickly this quarter as it did during the first two quarters of the year and linger into the fourth quarter.
- The mid-quarter policy driver during the fourth quarter may be the mid-term elections held in November. This event may be potent enough to turn sentiment around and produce gains for the year in line with our forecast for modest single-digit gains.
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- In his recent testimony to Congress, Federal Reserve Chairman Ben Bernanke used the phrase “unusually uncertain” to describe the U.S. economic outlook. However, based on the Fed’s own words, this current level of uncertainty is actually common at this stage of the economic cycle.
- The response by the Fed to uncertainty over the economic environment has been anything but uncertain. They always provide the economy with one last booster shot of stimulus.
- We believe the Fed will remain on hold this week, but could undertake additional stimulus if the uncertainty lingers later this year.
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- A catalyst for a late year rally could be the upcoming mid-term elections.
- The market’s reaction to mid-term elections has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years.
- So far, the stock market performance in 2010 has tracked the typical pattern for U.S. stocks in mid-term election years, albeit with a bit more than the usual volatility.
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