With the economic calendar on the thin side, stocks will likely struggle to sustain Thursday’s surprise gains.
Growth concerns remain behind the ongoing market weakness, which has kept stocks in the red over the last few weeks. Other than pure bargain hunting, I don’t see any catalyst that can help reverse this trend in the coming days.
Beyond the summer doldrums however, the outlook is not so glum. The earnings picture remains robust, though we have to wait another month for the second quarter reporting season to get underway. The interest rate backdrop remains very favorable, despite the scheduled end to the Fed’s QE2 program later this month. And valuations have started to look compelling, particularly following the sell-off.
Granted the economic readings have been unsettling lately and the economy’s growth pace in the second quarter doesn’t promise to be much of an improvement over the first quarter’s level. But this ongoing economic softness is largely due to temporary factors, such as the disaster in Japan and the surge in fuel prices, which will reverse in the coming days. Normal growth should resume in the second half of the year as these macro headwinds dissipate.
The ongoing market weakness reflects a lack of conviction in this second-half recovery theme. Stocks are looking for some evidence that will show the resumption of growth in the second half. But we will likely have to wait some more for such evidence to emerge.
The Treasury Budget is scheduled for release today at 2:00 PM EST, with an anticipated deficit of $139.3 billion, following the reported $40.49 billion deficit in April.
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