State of the Market

The overall market sentiment now is very similar to that of the previous quarter.  There is still plenty of skepticism around, driven by uncertainty of this recovery and the very fact that market gains happened so extraordinarily quickly.  We are still climbing the wall of worry, with many investors remaining on the sidelines convinced that we are in the bear market rally (which from the contrarian point of view is the ideal market condition).  Similarly to the last quarter, the coming earnings season is going to be hugely important.  Q2 (as well as Q1) results exceeded expectations, and of course the markets are driven by the earnings.  If this trend continues, so will this rally.

There are also important differences between current and previous quarters.  Major economic indicators improved significantly.  For example, then the economy was still contracting (although at a lower rate of decline) and housing prices were falling.  Now it is a virtual certainty that GDP rose in Q3 and the housing market is stabilizing.  Not everything is roses, of course.  Just a few days ago, manufacturing, consumer confidence, and unemployment reports were worse than expected.   This recovery, as any other, will have its hurdles and the markets could get bumpy.

The market action over the last two years confirmed my long-held belief that market timing is impossible and that one has to stay invested to participate in sharp upward moves.  Chances are, someone who sold on the way down is still on the sidelines waiting for a good market.  And they often buy after the market has already been good.