Back Story - Maria's Investor Brief - July 4, 2011

Wrapping Up the First Half

Happy Fourth of July! I hope you are all enjoying the long holiday weekend.
Along with celebrating America’s birth and our country’s freedoms, we’re also entering the second half of the year. After a rough May and June, the markets certainly finished the first half of 2011 with a bang. Last week ended up the best week in two years for stocks.

So here’s where we stand at the midpoint of the year:
-- S&P 500: +5.0% in the first half; -0.4% in the second quarter.
-- Dow: +7.2% in the first half; +0.8% in the second quarter.
-- Nasdaq: +4.5% in the first half; -0.3% in the second quarter.

Those numbers are better than a lot of people would have guessed a few weeks ago, thanks to last week’s strength. A variety of factors came together to boost the markets — temporary relief over Greece’s debt problems with the new austerity measures and payment, a few better-than-expected economic data points (like today’s report on manufacturing activity), and quite probably a technical bounce from oversold conditions.

How long it will last is the real question.

The soft patch in the second quarter changed the expectations of many analysts and corporate leaders for the second half of the year. The next earnings reporting season is a little over a week away, and second-quarter results will be key to how the market does. Everyone will be watching to see if last quarter’s earnings were impacted by the soft patch and whether guidance for the rest of the year also gets reduced.

I am hearing from an increasing number of people who are now a little more optimistic that the second half of the year will have a snap back. Some cite the normalization of the Japanese economy in the next six months, which would certainly benefit auto and electronics industries around the globe. Also, many analysts expect oil prices to stay relatively low through the second half of the year, which helps consumers at the pump as well as the costs of production for many goods and services.
Still, other investors are a bit more skeptical. They see a weak Europe, a slowing China and a fragile U.S. that could weigh on the market in the second half.

Given the fragile state of the markets and the economy at this point, many traders I talk to believe the Federal Reserve will continue to help stimulate the economy in some fashion — even if it doesn’t have a fancy name like QE2. That ended last Thursday, and there’s a real question as to what happens now that the Fed has quit buying bonds.

I’ll be following these second-half stories closely right here in Investor Brief. In the meantime, enjoy the rest of your holiday weekend!