The first half of the year saw its share of record highs for both the Dow and S&P 500 but also the return of market volatility, with a February mini-correction that surprised many, anxiety over subprime lending and interest rates and a healthy dose of M&A.
February's stumble was short-lived and it wasn't long before the Dow was breaking 13,000 for the first time in history and the S&P 500 reclaiming the 1500-level for the first time in more than six years. The first-half run ended about a month ago when both indices peaked on June 4 with the blue-chip index just 324 points shy of 14,000.
The Dow Jones Industrial Average shaved 13 points Friday, while the S&P 500 and the Nasdaq Composite moved lower. For the week, the Dow rose 0.4%, the S&P 500 ended flat while the Nasdaq rose 0.6%. The S&P ended the second quarter with a gain of 5.8% while the Nasdaq posted a three-month gain of 7.5%.
What does the second half have in store of investors? We asked some top market watchers and strategists to share their insights and predictions. Here is a sampling of CNBC's coverage.
Abby Joseph Cohen: Still Bullish
In a special edition of "Power Lunch at the Four Seasons," Abby Joseph Cohen, the chief U.S. investment strategist at Goldman Sachs, stood by a prediction from earlier this year: The S&P 500 will hit 1600 in 2007 -- "based on the idea that profit is [still] good."
S&P investors needn't fear a timid Federal Reserve, says Cohen. She assumes the Fed will continue to "stay neutral" -- and remains confident that, even without rate cuts, the S&P will be buoyed by "robust" industrials, and upper- and middle-income consumers "doing quite well."
Cohen says energy swings may not hurt the U.S. economy as much as some fear. She is more concerned" about the effects of seesawing fuel prices in other economies, such as China and India -- "who use a lot more energy per unit of GDP" than America does.
Cohen says growth in Europe and Japan is proving "very helpful" to the U.S., which is "not only a huge importer, but is even more a huge exporter as well."
Andrew Acheson, portfolio manager at Pioneer Independence Fund, told “Street Signs” that he expects the market to move higher -- despite concerns about the subprime loan market.
“I think the market can continue to do well throughout the year,” Acheson said. “The valuations are still very reasonable, and inflation is under control. The Fed is vigilant, but there are plenty of reasons to be optimistic.”
Acheson recommended technology stocks: “Technology is one area where I think there are still plenty of good opportunities,” he said. “The valuations are relatively low –- not just in relation to their history, but other parts of the market." He cautioned that utilities have posted stronger-than-expected earnings growth but face increased regulation.
Rates, Risk: Make-or-Break Factors
On "Morning Call," Ned Riley, CEO of Riley Asset Management, and Alan Lancz, president of Alan B. Lancz & Associates, agreed that interest rates may be the prime stock market mover. But they split on where rates and stocks are headed, as the economy enters the fiscal year's second half.
Lancz declared that "interest rates, not oil, not private equity" will be the "No. 1 factor" dictating stock market activity in the second half. In early June, rate hikes rendered him bearish. He said that June "put risk back in investors' equation," citing rising rates, "subprime loans and higher energy" as stimuli for "more volatility and 100-point swings" in the future.
Riley is more optimistic: Despite $70 oil on Friday, he pointed out that "Right now, the inflation rate is in target for the Federal Reserve." He does not believe interest rates will rise, and cites "very apprehensive investors" in the market -- but insists that the "reasons everyone cites for a correction have already been discounted."
'Between Cautious and Bearish'
Charles Bobrinskoy, vice chairman and director of research at Ariel Capital Management, is "somewhere between cautious and bearish," while Patricia Chadwick, president of Ravengate Partners, "is not as worried."
On "Morning Call," Bobrinskoy cited "one more bubble that's yet to burst: leveraged debt." He believes that when bonds' "historic" tightness relative to Treasurys finally widens, it will hurt rates at which hedge funds borrow -- sending ripples throughout the markets.
Bobrinskoy recommends quality firms with less risk -- particularly, consumer brands.
But Chadwick is more cautiously optimistic, calling the underlying pinnings of the market "good." She believes that the valuation of the market is still attractive, and earnings growth is "definitely fair."