Financial Markets' Summer Slumber

After a year of wild swings, steep plunges, and big gains, financial markets in the U.S. and elsewhere appear to be taking it easy this summer.

The Standard & Poor's 500-stock index has dropped 0.7% during the past month. The MSCI EAFA, an index of foreign stocks, is down 2.5% during the same time frame. Crude oil is stuck around $60. It rose 55% after bottoming in March and then fell 10%. And the dollar, after declining 10% against the euro, has been stuck in a trading range for the past four weeks.

Even Goldman Sachs' blowout earnings on July 14 only nudged the S&P 500 up 0.5%.

All Eyes on Earnings

What's the market waiting for?

In a word, earnings. With the widely heralded Goldman release out of the way, analysts, traders, and other market professionals are watching company profit reports for clues to the health of the economy. Whether a company meets, beats, or misses expectations is less important than what companies say about the future. "People aren't looking at the results but at the guidance," says Frank Ingarra, assistant portfolio manager of the Hennessy Focus 30 Fund (HFTFX). And while everyone knew that Goldman would make a mint, professionals are paying close attention to Bank of America (BAC), which releases earnings on July 17, and other struggling banks.

Market players may also be enjoying a period of relative equilibrium after the jaw-dropping stock market gyrations of the past two years. It's not often that stocks drop 57% and then bounce 40%. The experience has left many investors shell-shocked and trying to figure out what stocks are worth. "The Mar. 9 lows priced in Armageddon. When it looked like we weren't going to experience the end of the world, the market rallied," says Ron Florance, director of asset allocation and strategy at Wells Fargo (WFC) Wealth Management. "Now, it's consolidating."

Mixed Signals Flummox Investors

Economic developments suggest the market could go either way. On the one hand, the Fed has cut rates as low as they can possibly go, while Congress passed the $787 billion stimulus package, whose impact should be felt soon. Time to buy, right? But unemployment is on the rise and housing has yet to find a bottom, two factors that favor the bears. "There's a lot going on, but forces are counterbalancing right now," says Dean Curnutt, president of Macro Risk Advisors, an equity derivatives strategy and execution brokerage.

Now it's up to investors to make sense of the mixed signals. David Kotok, chief investment officer at Cumberland Advisors, believes that as long as the world's central bankers keep interest rates at or near zero, stocks are poised to move higher. "The stock markets have an upward bias worldwide and will continue to have it until policies change," says Kotok. He has been watching what the central banks are doing—not what they're saying —on a daily basis to make sure that he's not caught off guard.

Others are not so sure. They can't imagine a recovery in corporate earnings without consumer spending, and with the unemployment rate nearing 10% and pushing higher, that's not likely to happen any time soon. That would seem to indicate lower stock prices. "There will be better opportunities to enter the market at lower, maybe considerably lower, prices," says Macro Risk Advisor's Curnutt.

Too Soon to Tell

Could it be, however, that the market is efficiently priced? With the economic factors pushing in both directions, and investors unwilling to place big bets, stocks could be stuck in a range for a while. "It's too early to say whether we're in the midst of a pause or pullback," says Brian Nick, an investment Strategist at Barclays Wealth (BCS). "People want to see what's happening next."

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