Right now, investors are faced with a number of critical questions concerning the coming weeks ahead. As we enter the September/ October window of the Market year, what is the outlook for stocks? There are lots of commentators in the media, making a number of wild predictions. Some of the predictions range from a view that stocks will make a new high for 2009 during this period, to the whispers of a few market analysts who seem to foresee another Stock Market crash coming around the corner. But what is the truth? And what about the correction of ten to fifteen percent everyone is calling for and talking about? Where is the S & P heading, up or down? Is this a bear market correction we are in right now, or have we already started a new bull market?

These are all realistic questions and certainly worthwhile concerns. But the truth is, no one knows for sure what is going to happen. However, this being said. I would like to offer my own views on what is happening in the US Stock Market. However, I need to qualify what I am going to say in this article by reminding you to read the series of articles I wrote recently entitled, "The Big Picture." In order to understand fully my assessments below, you need to read all eight articles in the "Big Picture" series. 

First, I have no reason to believe that stocks are anywhere near a correction like the one for which most commentators on the market seem to be waiting. With interest rates at historic lows, stocks are still cheap. Moreover, the majority of stocks on the S&P are still in uptrends, and market sentiment appears to me to be extremely negative, I see no reason for a correction. In fact, the market is clearly in a mode of confounding the market bears. Everytime market makers try to go short and lead a new trend, money on the sidelines, and money managers who have missed this leg up, launch into the market, buying stocks precisely in the sectors most suited to the situation. Investors are buying energy, metals, financials, precious metals, industrials and any other stocks with high betas. This trend is typical of the early stages of a major bull market. 

Second, as the dollar falls in value,  precisely because of the extraordinary low rates here in the US, China's leaders have turned up their volume,  calling for a new reserve currency for the world. This sentiment from the Chinese is a major tell for investors. China's devalued yuan is less of a deflationary force in the world's economy when the dollar and all other major currencies fall against its value. This is happening and lessening the "China Effect" in the West. The result is that protectionism has become less of a political possibility for the near term future. This is extremely bullish for the Stock Market both here and in Europe. 

Third, most of the negative sentiments, including the whispers from the prophets of doom (who claim that a market crash is just around the corner),  are based upon the coming 2010 income tax increases. Some of these negative people also seem to have an axe to grind against the idea of the governmental controls, especially those originating from the Obama administration. These prophets of doom seem to think that the end of the Bush Tax reductions means the end of the bull market. They are wrong. If indeed the Bush Tax reductions are allowed to expire, individual business owners and corporations will do what they always do when taxes rise. They will pass the costs on to their customers. Tax increases, if they do in fact come, will be inflationary. The expense of the increases will have to be passed on in higher prices, and these higher prices will mean more inflation. Bull markets can handle this kind of problem. They have before and can again.

However, there is still a good chance that the Bush tax cuts may survive - at least for a while. The reason for this is the continued rise in unemployment. As Congress watches this important reelection barometer rise above ten percent, members are becoming more and more nervous about tax increases of any kind. It is quite possible that members of Congress may postpone the increases - if unemployment continues to be in the headlines. This, if it happens, will be bullish for stocks. 

Fourth, with monetary policy realitively loose and interest rates at historic lows, inventories of goods are receding significantly. This means companies must produce more in the future to restore inventories to their normal levels. As these companies begin this process, they will attempt to do so without calling back  laid off workers. This will produce a further rise in worker productivity with the result of an increase in corporate profits. Expect third and fourth quarter profits to begin demonstrating this trend. Profits in the third quarter should surprise on the upside. So will stocks.

Fifth, the Stimulus Program's spending will accelerate in the third and fourth quarters of this year. This will boost GDP and add to the profits of American companies. Stocks will respond in kind. Be ready for this Stimulus Effect. Stimulus spending has been tepid so far this year,  so we have not had the experience of seeing it impact the market very much. In the third and fourth quarters, this impact will begin to manifest itself. Stocks will respond to this apparent stimulus spending by rising in value.

Sixth, residential real estate has hit bottom and begun to turn up in Florida. It appears to be at or near the bottom in California and Arizona. Nevada remains a question mark. If any kind of report or news hits the market implying in any way that the decline of residential real estate is over, expect the market, and particularly bank stocks, to take the lead in the market again. The cries of doom concerning the coming crash in commercial real estate are also over blown. The Federal Reserve has already taken note of commercial real estate's problems and has begun establishing some emergency programs for commercial lenders. This is where the crisis lies - the lenders. Commercial owners need accessable lenders who are willing to refinance their properties. So long as the Fed continues to address the lending issues in this very specialized area of real estate, investors need not worry about some kind of commercial real estate crash. 

Finally, "trash stocks," or stocks with poor fundamentals and lots of debt, are beginning to move to the side in this Fall Stock Market period. New leaders are coming forward to replace them. The new leaders are stocks with low debt, high cash on hand, and exposure to markets beyond the US. Look to these kind of stocks for your coming investments. Stocks with good fundamentals and low debt will lead the next leg up and more than likely help make you rich. 

John K. Brackett, Ph.D.

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