The ongoing European financial crisis, uncertainty about the U.S. economy, the impending federal government “fiscal cliff” and the upcoming U.S. presidential election will play major roles in influencing the stock market in the second half of the year.
Most stock analysts are advising investors to be cautious right now as the situations resolve themselves.
“We are currently in the protect mode,” said Kurt Rozman, senior financial advisor and president at Rozman Wealth Management in Brookfield.
Rozman takes a growth approach when things are healthy, but a protect mode in uncertain environments like this one. The company is currently investing about 75 percent of the average portfolio in short term treasuries and cash and the rest in various equities.
“There’s people who think they’re going to find the bottom on this,” Rozman said. “The probability is that nobody knows what the exact outcome of this European Union will be. We unfortunately don’t see a tremendous amount of reward potential because of the issues the entire world is facing.”
The second quarter moved the market from individual and sector stories to overwhelming risk on or risk off sentiment, said William Delwiche, an investment strategist at Robert W. Baird & Co. Inc.
“The chances are we get back into some sort of sustained rally mode,” Delwiche said. “I don’t think we’ve seen evidence yet that that’s emerging.”
Presidential election years generally see a stock market rally in the second half of the year, but the fact that this election is particularly negative and with the other global factors in place the market could behave differently during the second half of this year, he said.
Delwiche is advising investors to watch risk exposure and be generally defensive, focusing on health care, securities and corporate bonds, which are not as volatile as the overall market.
Nancy Jensen of RBC Wealth Management in Milwaukee sends clients a daily comment about the market with the help of Confluence Investment Management in St. Louis. The latest advice has been to prepare portfolios for an ongoing risk off market.
The overall trend since 2000 has been a secular bear market, in which the market trends downward over 10 to 15 years, said Bill O’Grady, a chief market strategist at Confluence. He expects the trend to continue for another five years.
As a result, Confluence recommends looking for dominant companies to buy at a discount, focusing on dividend-paying stocks and balancing investments between fixed income and equities.
The immediate global issues facing the market probably won’t create a dramatic change in the second half of the year, O’Grady said.
“With all these concerns, we’re anticipating a fairly sluggish second half,” he said. “Earnings are still the key issue for stocks and as long as the economy doesn’t go into another recession, earnings should remain the same.”
