Recapping the First Half of the Year

With the halfway point of 2004 coming up on Wednesday, I thought it might be instructive to reflect on the macro gains and losses the market has seen so far this year. I'm not referring to any specific winners or losers you may have had. Instead I want to take stock of the broader issues affecting the financial environment and your portfolios.

Some of the key factors I track closely haven't changed much from where they were at the beginning of 2004.

Major U.S. markets. Much to the surprise of many people, the markets have made scant progress in the past six months. In their year-end predictions, many pundits (yours truly included) expected to see the momentum from 2003 continue but ultimately fade by midyear. Instead, the market stumbled by the end of January and only broke its six-month downtrend last week. As of Friday's close, major indices were within a percentage point or two of where they began the year. It's as if the first two quarters of the year never happened.

The second half gives investors another chance to try to catch an early part of a bull leg up. Given the recent mutual fund outflows, will individual investors be late to the party again?

The macro economy. First deflation was the enemy, so the Federal Reserve announced that it would do whatever was necessary to stop this scourge. Whoops! Did I say deflation? I meant to say inflation.

As last year's tax stimulus faded, the initial fears were that, like Japan, we were about to enter a deflationary cycle. Not only did deflation fail to materialize, but the new fear became that the economy was getting too hot to handle. If inflation reared its ugly head, the Fed would be forced to react.

GDP, durable goods and unemployment levels have dropped to sustainable levels. The economy has entered a lukewarm, noninflationary growth stage.

---

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.