The Bears gain advantage half way through 2010 by Ken Mahoney

THE MARKETS:

In the first quarter, investors excitedly climbed a hill. In the second quarter, they were pushed off the other side by three bullies – April, May, and June. After experiencing the best first quarter performance in over 10 years, the second quarter unleashed mayhem as the broad S&P index fell 12%, the Dow dropped 10%, and the Nasdaq slipped 12% amidst the sputtering global recovery. What are some of the factors that have been weighing on the markets? Most of them can be grouped into two main categories:

1) Global Turmoil
When you look at the whole picture – problems in Europe with the PIIGS (Portugal, Italy, Ireland, Greece, Spain), slowdowns in China and the U.S., geopolitical concerns associated with North Korea and the Middle East – it’s easy to see that the global recovery is under attack.

2) Domestic Concerns
Investors and analysts alike have worried about the employment situation, housing woes, burgeoning U.S. debt, uncertain legislation affecting financial institutions, weak consumer confidence numbers, and other disturbing indicators threatening the recovery.

Whenever we discuss how the economy affects the stock market, it is good to remember that they are not one in the same. Although the condition of the economy often affects the behavior of the markets, the two do not always move in tandem. In recent months though, stock investors have been especially focused on the economy for signals of recovery to guide their investment decisions. The result has been that mixed economic data has undermined confidence in the markets.

So what can we expect in the quarter ahead? Frankly, there is a strong case to be made for the bulls and the bears. Consider just one argument for each side:

BEAR: The S&P 500 is currently down more than 15% from the highs of late April. Going back to World War II, a decline of 15% off the highs has frequently turned a correction into a bear market – a drop of 20% to 30% – according to Standard & Poor's chief investment strategist Sam Stovall.

BULL: Analysts currently expect 2010 earnings to rise 34% from a year ago, the biggest year-over-year growth since Thomson Reuters began tracking the figures in 1998. For 2011, analysts expect year-over-year growth of 17%. The P/E ratio for the S&P 500 is currently 12.3 – significantly better than the five-year trailing average of 14.2, and a strong case for stock investing.

One thing almost all the analysts agree on is that we will see a period of sustained volatility during the months ahead. As an investor, it is wise to assess your own risk tolerance from time to time and make sure you are allocated suitably for your personal investment objectives.

How the major indexes performed
Index Second-quarter performance
Dow Jones Industrial Average -10.0%
DJ U.S. Total Stock Market -11.6
DJ World (excl. U.S.) -12.7
Amex Composite -5.8
Russell 2000 -10.2
Value Line (Geometric) -11.6
S&P 500 -11.9
Nasdaq Composite -12.0
NYSE Composite -13.1

Sources: WSJ Market Data Group; DJ Indexes. All index returns exclude reinvested dividends.
Indices are unmanaged and cannot be invested into directly.