What is happening with the stock market?

Written by Nate White, CFA, Paragon's Chief Investment Officer

The stock markets have rallied since mid March when the credit crisis was in full gear and Bear Stearns was collapsing.

Just when it looked like the financial system was nearing collapse the trusty Fed came to the rescue by lowering rates and bailing out Bear Stearns. The long term implications of the Fed's actions in bailing out an investment bank remain to be seen.

For the moment it looks as though their actions have calmed the storm as credit spreads have narrowed, market volatility has decreased, and equity markets have moved higher.

Now that the Fed has signaled that it could be finished with interest rate cuts the market has started to focus on inflation and what the Fed will do if it worsens.

I don't need to tell you what has been happening with energy and commodities as it is a constant media topic and you see it first hand while filling up your vehicle and buying groceries. The Fed hoped to calm the credit crisis by lowering rates to get the economy moving but these actions have weakened the dollar further and sent commodity prices soaring.

If the economy continues to slow down then it could put a damper on the run up in commodities. However, if inflation gets worse it will force the Fed to raise rates at some point, but the odds are against it ahead of the elections.

With the current markets being down year to date, many have wondered what to do for the second half of the year.

Sell in May and go away?

There are prospects for the U.S. market to go higher for the second half of the year. The market has had a tendency to rally after May in an election year. The market also tends to have stronger performance following market lows during economic recessions.

There is also a tendency to rally after the Fed's last rate cut as Wall Street anticipates better economic performance. Summer is usually a quieter time on Wall Street, but that may not be the case this year -- for good or ill.

Here is the performance of U. S. markets this year (5/28):

S&P 500         -4.47%

DJIA               -5.06%

NASDAQ         -6.24%

Russell 2000   -3.11%