Investors were cheered by a two-week rally at the end of July that lifted spirits and indices alike. The Dow Jones Industrial Average and Standard & Poor's 500 Index saw increases of more than 11 percent. The news that fueled this upturn concerned corporate earnings, which exceeded expectations across the board. The Dow rose above 9,000 for the first time since January 2009, adding a psychological boost for investors who wanted to see indications that supported their faith in the economic recovery.
Positive earnings surprises from industry leaders such as Apple, Starbucks, AT&T and 3M were behind the market surge. In addition, Caterpillar, pharmaceutical company Wyeth and the Hershey Company raised profit forecasts, providing further proof that the rebound is buoying earnings across many sectors. If strong earnings were the catalyst behind the market's momentum, were there other signs to support Wall Street's optimism? Other positive news in July came from the beleaguered housing sector, which yielded a better than expected report on existing home sales.
A major question remains as to whether the rally is sustainable or liable to lapse into a sideways direction again. The bears caution against unrestrained optimism. Many believe that the economy is showing signs of recovery and that the worst is over - but most are hedging their bets. Some believe the July rally is primarily faith-based, and that the momentum generated by this optimism could reverse itself just as quickly and with little warning. Some bears believe that we have at least another five months of turbulence ahead and that the global recovery will be slow and require sustained help from government and regulatory bodies.
Despite the U.S. corporate earnings surprises and the strong outlook for the last six months of this year, some experts believe that the rest of the world will recover faster than the U.S. Regardless of the risk of currency fluctuations - a wild card for investors in overseas markets - some advisors believe that U.S. investors will decide to reduce the risk of owning stocks by diversifying into foreign holdings. They see consumers in emerging economies as the drivers of a worldwide recovery. Accordingly, advisors are suggesting that clients invest in IT companies, especially those producing cell phones, netbooks and flat-screen TVs - goods that are expected to be in high demand in emerging nations.
Other market observers feel more positive, but their advice to investors is cautious. Individual investors are generally being advised to consider rebalancing their portfolios by reducing cash and identifying stocks with upside potential while retaining their high-quality bonds.
Cautious optimism is the spirit of the moment. While some analysts suggest clients take profits and resume a posture of cautious vigilance, others advise keeping a close eye on stock valuations so they can lock in gains when the current momentum reverses.
The commentary in the preceding paragraphs reflects various viewpoints, and is not intended to be a substitute for counsel from your tax and investment professionals.