Stock Market: Is The Glass Half Full or Half Empty?

Stock Market News

July 2007

Stock Market: Is The Glass Half Full or Half Empty?

There is never any shortage of diverse opinions on where the market is headed. The subprime fallout, and the realignment between the financial market’s prognosis and the Fed’s have provided much food for thought recently. Here’s an overview of key issues and what the pundits are saying about them:

Towards the end of June, a group of Wall Street financial institutions attempted to rescue two hedge funds run by Bear Stearns that had suffered major losses in the subprime market. Many investment advisors remain concerned—not so much by what has happened to date, but rather by what else may be in store. The big question is whether additional losses in subprime mortgages might send yields higher on other forms of riskier debt. If this happens, it may create a ripple effect damaging other hedge funds, and may also hinder private equity transactions. Bottom line: further fall-out from the subprime fallout could have a detrimental effect on the stock market, hurting share prices.

After a year at the helm of the Federal Reserve, new Chairman Bernanke has won the respect of leaders in the financial world. Financial markets no longer bet against the Fed’s economic and monetary policy outlook. The Federal funds futures markets now indicate that investors are in line with the Fed’s thinking and are not expecting further rate cuts this year. Of course, this doesn’t mean that the Fed (and the market) will be right on all counts, but in a world where confidence is everything, Bernanke has won his stripes and credibility with Wall Street.

Recent investment newsletters have ranged from cautious to down-right bearish. For investment contrarians, this “grass roots” sentiment means good news—that the bull market is likely to run a while longer. At the root of contrarian analysis is the belief that investor, en masse, tend to be wrong about the direction of the market—especially at critical turning points. Their market timing theory is based on a historic review of market patterns. Investors tend to go with the flow—that means that if the market is rising, investors expect it to continue, and if it declines, they expect further losses. It works something like this: the market peaks when there are few bears out there—almost everyone with cash to invest in equities has done so, which means there’s little cash out there to force prices higher. Using the same reasoning, when the market reaches a bottom and everyone who can sell their stocks has done so—the chance of further downward selling pressure is minimal. Contrarian theory is not always reliable or correct, but its proponents like to note that “bull markets climb a wall of worry”.

Whatever your perspective on the markets may be, remember that knee-jerk reactions are rarely profitable. The best plan remains an investment strategy tailored to your circumstances based on expert counsel from your own professional advisors.

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