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Stocks Set to Rebound in Second Half of 2011

BOSTON (TheStreet) -- It's easy for investors to think the sky is falling, given the drumbeat of dour economic news in recent weeks.

But those fears, which resulted in a 7% tumble in the S&P 500 Index over the past six weeks, may be overblown, several money managers say.

That's because much of the bad economic news has already been already factored in to stock prices. Meanwhile, U.S. corporations' fundamentals remain solid after a 19.4% jump in S&P 500 earnings in the first quarter. Besides, investors have few places to go other than equities as fixed-income returns dwindle.

That sounds like a value-oriented, stock-pickers' paradise. So why the "chicken little" reaction?

Investors' wall of worry has been built by sovereign-debt-default concerns; high unemployment, now at 9.1%; rising gas prices; slower-than-expected growth in manufacturing; ever-slumping home prices; and, finally, the uncertainties over the end of the Federal Reserve's stimulus programs and Congress' dickering over the national debt ceiling.

Thomas Winmill, who manages the Midas Fund (MIDSX) and is chairman of the investment-policy committee for the Midas Perpetual Portfolio Fund (MPERX), said the pedestrian economic growth is what's hamstrung the market's performance. "There were hopes and expectations for continued strengthening in the economy that have not been realized, and that has caused disappointment."

Mark Zandi, chief economist at Moody's Economy.com, said in a June 14 research note that he had forecast gross domestic product (GDP) growth of almost 4% for this year, but "instead, (the pace of ) growth for the first half is coming in closer to 2% and will be just below 3%, at best, for the full year." The International Monetary Fund came out with virtually the same outlook Friday.

Zandi said his revision is largely due to an unexpected surge in oil and food prices and the fallout from the catastrophe that struck Japan in mid-March, which was more serious than anticipated.

He expects U.S. economic growth will pick up its pace as energy prices decline and Japanese parts suppliers recover and renew feeding U.S. car and technology manufacturers.

Another sign of improvement: In its regional economic survey, the beige book, the Federal Reserve reported last week that its 12 district banks "indicated that economic activity generally continued to expand" even as "a few districts indicated some deceleration."

Winmill remains optimistic about the balance of the year. "I would suggest that the market is way oversold, and people have reacted too strongly to the disappointing economic news."

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