For the next six months, uncertainty is likely to reign in the stock market, although it's a more bullish kind of uncertainty.
Fading is the near-fanatical desire for the
Federal Reserve to "rescue" the equity market.
Since last Thursday, market sentiment has turned positive in a way that it hasn't since the market's rally last August. Then, believing the late-summer upswing would continue, the market came back from Labor Day and was slammed with earnings warnings, economic slowdown and more earnings warnings.
Investors are pondering what comes next after the last week's rebound. The recent action doesn't necessarily proclaim the bear market over; only a lasting rally will technically spell the end of the bear market.
But investors interviewed believe the market's bias is toward slightly higher prices in coming months, despite expectations for aggressive selling of rallies, surprising earnings warnings and mixed economic data that are sure to have people scratching their heads at times.
The best indication that the market is looking on the bright side may be the reaction today to the
Consumer Confidence Index
. The index rebounded sharply in March, instead of dropping as economists expected. But what was startling -- in a constructive way -- was that the market, after some initial jitters,
on the news.
A few weeks back, the market would have sold off violently, tearing its hair out and railing at the sky, "How dare you curse us with a strong economy! We want a recession so the Fed can save us!"
"Market participants had expectations as to what the Fed would do that turned out to be out of sync with reality," said Joseph Keating, chief investment officer at
in Grand Rapids, Mich. "Expectations are starting to get aligned with reality."
The change in sentiment shows the market is now looking for positive indications, rather than signs of further negativity to, if it's possible, "get the recession over with." They've accepted that the Fed is indeed on their side, though it tends to work more slowly than the market wants. They've accepted that not only is the economy not collapsing, it's not a bad thing, either.
Choppy action and volatility could ensue, however. Technicians would expect the major indices to retest their lows, that is, drop to somewhere near last week's levels as money managers establish and re-establish that there's demand for stocks at a particular level.
What might bring that on is a batch of mixed economic data, which the market is sure to be faced with in coming months. Consumer confidence improved markedly, but it's likely that the unemployment rate will continue to rise in coming months, as previously announced layoffs from companies begin to work their way into the economy. That could reduce consumer spending -- and create a situation where economic data weaken just at a time when the market is proclaiming the slowdown over.
"We're going to take two steps forward and one back, or three forward and two back; the composition of large, well-known market indices is still very tech-heavy," said Jim Russell, head of equity research at
Fifth Third Bank
in Cincinnati. "Clearly, manufacturing is in a recession, and technology has an inventory overhang and overcapacity that needs to be worked down."
However, the stock market, being a mechanism that discounts future activity, will tend toward more positive action if there are indications that earnings and corporate profits are benefiting from the halting signs of recovery being witnessed in recent economic releases.
That's where some more uncertainty comes in. It's true that warnings from companies have lost their ability to shock in the last week or so; companies saying earnings will fall short of expectations haven't had the catastrophic effect they did back in January. Corporations haven't started detailing improvements yet, though. Money managers looking to maximize return are buying now on the assumption that sometime in the second quarter companies will start to sound more positive about their businesses.
But that opens investors up to risk as well, and when a well-regarded company (say, other than perennial disappointment
Procter & Gamble
) suddenly comes out in June and says things aren't going well, another downdraft in the market could occur, shaking investor faith yet again.
"There's going to be a bellwether company that says second-quarter results really stink and that's going to be an 'Omigosh!' day," said Charlie Crane, market strategist at
Spears, Benzak, Salomon & Farrell
. "This will provoke ... 'I told you so, we're not out of the woods yet' type of selling."
Days like that in this environment, while looking more positive than negative now, could frustrate many. Rather than freaking out at the notion of certain death, however, it seems people are looking on the
bright side of death.