Analysts and individual investors alike took heart from the recent rally that took us from late March into April, but a few weeks later we’re back to the same old question—is the worst over? Mixed news from the markets and the economy suggests that while things are improving, definitive claims that we are in a recovery period are premature.

Why all the dithering? Analysts indicate that although investors are keen to embrace good news, significant uncertainty remains regarding American banks and the timing of a rebound of the housing sector. Many market experts anticipate that stocks will return to higher valuations for good, but that for now—and possibly the next couple of years—stocks will gyrate up and down and mini-rallies will take off only to run out of steam. In short, they don’t see the market making major corrections one way or the other—for a while. Some experts see the recent rally as almost a “sigh of relief”—relief that February’s economic indicators were not as bad as once feared—that key indicators were no longer plummeting. Whatever their take on recent events, most agree that we need to see the economic fundamentals improve—not just deteriorate at a slower rate.

Banking Sector
Attention—not surprisingly—remains focused on the banking sector and the administration’s efforts to stabilize America’s financial institutions. The results of the Obama administration’s policies to restore confidence in U.S. banks will be key factors in the pace of the nation’s economic recovery. Some analysts were heartened by good earnings news from major financial institutions including: Goldman Sachs, Citigroup, Bank of America, Wells Fargo and JPMorgan Chase. Others were less enthusiastic, suggesting that judgment should be postponed until the results of the upcoming “stress tests” to assess bank capitalization are made public. Some strategists support the administration’s moves and were buoyed by Goldman Sachs’ expressed goal to repay the Troubled Asset Relief Program (TARP). The naysayers were also keen to discuss the issue of the banks’ obligations to TARP and the administration’s possible concerns that repayments now might prove premature. Whatever position analysts take, they agree that the results of the “stress tests” will determine the direction of economic recovery.

Housing
Hopes of a real turnaround rose in February as sales of new homes improved, only to turn into disappointment in March. On the bright side, the decline was less than expected. All regions –with the exception of the Midwest where sales of new homes were flat—saw declines. In the hardest hit locations, prices have fallen by about a third. Some analysts argue that house prices were inflated and that these lower valuations are more realistic.

Investors—large and small—are faced with the same timing conundrum—should they re-arrange their asset allocations in case the market declines more, or should they keep their current stock portfolios to leverage the eventual upswing to restore their earlier losses. No one can answer this question, but they can counsel you on probabilities and the best options for you. Investors’ strategies will vary according to their personal situation—retirement dates and investment savings being important factors. Before making any moves, discuss your plan with both your professional tax consultant and investment advisor.