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Net Net: Promoting innovation and managing change

Will Stock Market Gains Outpace Inflation For Rest of the Year?

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By traditional measures of market sentiment—the weekly AAII sentiment survey—the market is relatively balanced. Bullishness has increased a bit but is still below the historical average. Bearishness has contracted, but is slightly above the historical average.

All in all, that’s a sign of a relatively healthy market. It’s not a panic, it’s not a bubble. It signals neither an explosive rise in the market nor a coming crash. Instead, we should expect something like a traditional slow rise in the market.

Similar indicators seem to emerge from another survey. CNNMoney has surveyed 26 forecasters—and every single one of them think the Standard & Poor's 500 Index will end the year between 1350 and 1375. That’s a remarkably tight band. It also would seem to bolster the case that the AII sentiment survey indicates that we’re due for a very mild rise in stocks for the rest of the year.

If these indications are correct, it may mean that investors will see gains despite higher than expected inflation. Inflation has been running a little hot lately, and it seems likely that prices will rise by 1 or 2 percent during the second half of the year. That would mean the expected gains in the stock market would easily outpace inflation.

At which time you can expect to hear a lot of Bernanke-bashing again.

But this raises the question: are we really going to see a 10 percent appreciation in stocks between now and the end of the year?

*An earlier version of this post had the math totally backwards, and drew all the wrong conclusions. We're grateful to our readers for pointing this out to us.


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