Retire Rich

August 7, 2009

Stock Market Just Might Actually Be On the Mend

The average return of U.S. equity mutual funds in the second quarter, a stunning 19.77%, was certainly welcome news, but it gave investors absolutely no reason to believe the stock market was turning around. After all, what fundamentals were there?

The market's surprising ascent was obviously not based on earnings, which continue to be steeply negative; the consumer, who's still saving 6.9% of their earnings rather than spending; an improvement in unemployment, which is projected to top 10% this year; or corporate investments, research and development, all of which are stagnant.

Value, in fact, has become the new watchword of CEOs of luxury and bargain brand retailers and manufacturers alike.

And remember, housing prices are down as much as 25% in even the strongest markets, like New York, and year-to-date through the end of June, while U.S. diversified equity funds may have risen 6.51%, they were still down 26.52% from a year ago.

Nonetheless, there have been a few significant events recently that appear to indicate the stock market might deliver decent returns in the second half of this year.

As we report in "Week in Review," mutual, pension and hedge fund managers have been investing large quantities of cash in recent weeks. And retail investors have become more comfortable moving out of cash and money market funds back into stocks and equity and fixed-income funds.

Sentiments were certainly buoyed last Monday, when the Standard & Poor's 500 Index broke above 1,000 on the news of a government report that construction spending rose in June and manufacturing will grow next month.

Taking all of this into consideration, BlackRock issued an optimistic outlook last week, noting that while a "great deal of uncertainty remains" and we have yet to see "a full-fledged recovery or a true upturn in manufacturing demand," there have been signs of stabilization in the United States in terms of home sales, housing inventories, business confidence and productivity levels.

While it would not be realistic to expect a strong recovery following this recession, as is the cyclical norm, the government's monetary and fiscal stimulations are beginning to kick in, and as cash from the sidelines moves into the market, equity returns could be fairly strong and steady.

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