In 2nd Quarter, Markets Revived but Pessimism Remained

The good news is that Wall Street finished its best quarter in years on Tuesday — part of a dizzy spree that lifted the broad market 35 percent since early March.
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Today's Business With Jack Healy on the Stock Market's Performance

The not-so-good news? It would take almost three more rallies like that to push the Dow Jones industrial average back to 14,000 and return markets to where they were before the financial crisis. On Wall Street — where exuberance, irrational and otherwise, is usually an art form — there is a nagging fear that the market is again losing its footing.

Despite signs that this downturn is easing, many Americans are more downbeat about the economy now than they were when the stock rally began. Unemployment is rising. Home prices are falling. Many corporate earnings are still weak.

“Less-worse isn’t the same as better,” said Barry Ritholtz, chief executive of FusionIQ, a research firm. “We want to see ‘good.’ In order to grow profits, in order for earnings to increase, in order for corporate America to start hiring and spending, we need to see greener shoots. So far that hasn’t really happened.”

If consumers continue to guard their money and banks sustain more losses from foreclosures, credit card defaults and losses in commercial real estate, analysts say that stock markets will face huge obstacles to growth that could keep investors in the doldrums for many more months.

Yet by almost any measure, the second quarter was one for the record books. The Standard & Poor’s 500-stock index was up 15.2 percent in the second quarter. The Dow Jones industrials gained 11 percent in the quarter, while the Nasdaq composite index soared 20 percent.

Many blue-chip stocks posted spectacular gains. Bank of America soared 94 percent. American Express gained 71 percent. Microsoft was up 29 percent.

But some analysts sense the euphoria is tempered. Markets ended basically flat for the month of June, pulled in different directions by economic figures showing improvement and those revealing unexpected weakness.

Trading on Tuesday underscored those wobbles. The Dow Jones average fell 82.38 points, or 0.97 percent, to 8,447. The broader S.& P. 500 slid 7.91 points, or 0.85 percent, to 919.32. Gains in some technology shares kept losses on the Nasdaq to 9.02 points, or 0.49 percent. It declined to 1,835.04.

The Treasury’s 10-year note fell 14/32, to 96 20/32. The yield, which moves in the opposite direction from the price, rose 3.53 percent, from 3.48 percent Monday.

Bullish forecasters say the S.& P. 500, which is up 1.8 percent for 2009, will continue to rise as the economy bottoms out, and close the year at 1,050 or 1,100. But bears say that taxpayer aid is still holding up the financial system, and they warn that investors who expect better returns may be in for a bitter disappointment.

“We feel like we’re entitled to go back up again,” said David Tice, a prominent Wall Street bear. “We went from the telecom bubble to the Internet bubble to the corporate finance bubble to the real estate bubble. Now each of those has broken. We have never been more convinced that the worst is not yet over.”

Some analysts say that stocks may simply rise and fall fitfully in the months — or years — to come without making broader progress, as they did from the mid-1960s to the mid-’70s. And they say that investors who once bought and held stocks or pieces of index funds and rode them higher will need to devise different investment strategies.

“The market is going to be range-bound for this year and going into next year,” said Mary Ann Bartels, head of technical and market analysis at Bank of America/Merrill Lynch. “Is the market still investable? Our answer is yes.”

Some investors say energy companies and basic-materials producers will lead the markets as commodity prices rise. Others like technology firms, emerging markets or any company that offers a dividend and is not steeped in debt.

Unemployment is at 9.4 percent, and economists expect it will rise to 9.6 percent when the Labor Department releases its June employment figures on Thursday. Private wages and salaries are continuing to fall, and Americans are saving more money as they try to hedge against job losses.

All of which, say some analysts, could mean slower growth in consumer spending, corporate earnings and stock prices in the months to come.

“We’d all like our stocks to go up,” said Mr. Tice, the bear. “But now’s the time to defend ourselves.”