Is The Stock Market Correction Over?

One has to be impressed by the market action last week.  Major averages such as the Dow Jones Industrial Average and the S&P 500, rose between 2.65% and 5.16% leaving all but the Nasdaq Composite in positive territory for the year-to-date. 

Investors were encouraged by last week's economic news which seemed to indicate a slowdown in economic growth and hopes for lessening inflationary pressures.  Energy prices moderated as well, as it appeared (at least for now) that the conflict in Lebanon would not spiral out of control.  And, perhaps most importantly, corporate earnings growth remains solid.

Last week's market action begs the question: Is the correction, begun last May, finally over? 

We believe there are reasons to be constructive and we expect further gains over the balance of the year.  Our positive stance is based on the following observations

• Solid fundamentals: Q2 reports generally met or exceeded expectations;
• Attractive valuations: With stocks off their spring highs and earnings continuing to grow, valuations have fallen to reasonable levels;
• Stable interest rates: Rising rates are almost never good for stocks.  The Fed pause and last week's news points to at least some rate stability in the near term, the potential for cuts in 2007 and providing a better environment for the stock market.

While more sanguine about the market's future, we are also mindful of risks that could derail a market advance.  Will the Fed's 17 rate hikes ultimately tilt our economy into recession resulting in falling profits and stock prices?  Will the conflict in the Middle East spread, disrupting oil supplies and raising global tensions?  Will inflationary pressures force a resumption of Fed rate hikes? Answers to these questions, unknown today, will come in time. 

Between now and then we're reminded that the greatest opportunities are often present themselves when uncertainty is high.