The Case for the Bull: Jim Glassman of J.P. Morgan Chase

TSC: At this point do you think the market's bottomed? Is the smart money getting back in?

Jim Glassman, U.S. economist at J.P. Morgan Chase: I think the smart money's going to tiptoe back in. But I get the feeling no one's in a big rush. Part of the reason, I think, is many parts of the market are still expensive. I get a feeling we're looking at a quiet time, people are going to be cautious, there won't be a big euphoric rush back. But gradually they'll start to look a little more kindly on some of the sectors. I think we're at that part of the pendulum swing where people have gotten too pessimistic, obsessing over earnings downswings.

The Case for the Bull: J.P. Morgan Chase's Jim Glassman

The Case for the Bear: Howard Rosencrans of HD Brous

I think people know that the economic picture's going to be sort of grim for the next six months, and with that will come bad earnings numbers. But I think most people are looking over the hump.

My guess is the smart money is going to be more selective. Despite the correction, there are still a lot of sectors valued pretty highly historically. I think people won't be willing to go whole-hog into the tech sector [until they] can see the economic bottom coming. I think the market will always be years ahead of everybody. Investors are always a step ahead of, certainly, economists. I think people are more willing to come back into, for example, the high-yield sector and where credit spreads are at levels you see in a recession.

I have a feeling it will take one positive report from the high-tech or telecom sector and suddenly everyone will be sensing the worst is over. The mood could change fast. What I think is interesting is everybody's gotten very glum on telecom [companies]. Well, I'm looking at the government's auctioning of the spectrum, and there's pretty aggressive bidding going on, which tells you companies see opportunity. This is the stuff needed to build out third-generation wireless communications. I'm asking myself, "If this technology's dead or the stock market's making it difficult to get financing, how come I'm seeing this?"

TSC: From the bearish standpoint, what about the three rate hikes that went into effect technically less than a year ago? Could they still cause problems for the economy?

Glassman: Ordinarily, you'd say it takes them a while to work through the economy. But if you look at futures contracts, the thinking is the Fed will be at 5% by summer. So we've already undone the tightening of last year and gotten the Fed back to the levels of a couple of years ago. So in a sense the market has unwound [those hikes]. No tightening is working its way through the pipeline, to my mind. And that's why if you're a homeowner, you're getting a rate under 7%, and the reason you're getting it is the market is assuming, implicit in that mortgage is the assumption the Fed is cutting rates.

TSC: Would you say that's another bullish factor? That more mortgage refinancings are expected now?

Glassman: It's a positive factor that's helping to cushion [things]. Whatever the economy will do in the next couple of months, it's helping to support demand.

TSC: And what would be some warnings signs for you? What would make you more bearish?

Glassman: I'm most concerned about business confidence. If businesses suddenly became [less confident], then what looks soft could become a prolonged slump. But from my point of view, all this means is, if the economy turns out to be weaker than we think, interest rates will go lower.

So for the stock market, the questions to ask are: Is inflation a problem or not? Most people will say no. Is accelerated productivity still in place? Most people would probably say yeah. And so eventually with the help of lower rates, the question is what is that long-run pace. To me, the most positive thing for the market is we're going through a downspout here, taking inflation pressures even further out, and that's setting the stage for lengthening the life expectancy of the expansion we're in.

It's not a reason to expect the market to start flying again. But by the same token, it's not a reason to be pessimistic.

Be sure to read the opposing bear case from Howard Rosencrans of HD Brous.