“The market is the ultimate discounter, looking months down the road — sometimes presciently, sometimes not — to anticipate events that will affect stocks,” writes Erin Schulte in today’s Wall Street Journal.

“The future must look pretty gloomy given what’s been going on on Wall Street, where stocks have drifted lower even as upbeat news about the economy and earnings showers investors like a splash of so much bright confetti. Does this ‘good news is bad news’ environment — when a booming economy only sparks talk of interest-rate increases — mean investors should keep steering clear of the market? Not necessarily.”

“A number of outside pressures are keeping the bulls in their pen, namely trouble in Iraq and the upcoming elections. Meanwhile, oil prices, up about 20% this year, have stayed high longer than anyone imagined. Demand is high, supply is tight and refineries are working at near capacity as the summer driving season approaches. Higher gas prices are already putting a strain on consumer spending. Interest rates are beginning to rise as well.”

“But investors who are less near-sighted see buying opportunities coming up. Many of the dark clouds that have shadowed Wall Street are about to part, and investors should be looking ahead, not at all the current troubles.”

” ‘At a certain point, the Fed will raise [interest rates] and that uncertainty will go away. The Iraq handover is going to occur, so that will be out of the way. Corporate profits in the second quarter will be strong, and as we get closer to the election, some of that uncertainty will dissipate,’ says Christopher Zook, Chairman and Chief Investment Officer of CAZ Investments in Houston.”

“Summer’s not usually a dynamic time on Wall Street, but investors worrying about losing their shirt in the next few months can breathe easy. Recent technical indicators point to a bottom in the market, with declining stocks outnumbering advancers by huge margins during a few recent selloffs.”

” ‘The market’s always anticipating problems, and the negatives were being discounted coming into summer. You tend to see market bottoms in May,’ says Marc Pado, U.S. market strategist with Cantor Fitzgerald in New York, adding that election years typically equal gains on Wall Street.”

“Since stocks are down now, indexes may be doing a lot of catch-up later this year — especially after one of the biggest question marks of all is cleared up in the November election. Better to get in ahead of this expected late-year upturn, is the theory.”
“The election is an especially huge weight on the market right now given the intense focus on geopolitical concerns, with Attorney General John Ashcroft issuing new warnings about summer terrorist attacks last week and continued fighting in Iraq. Suddenly, the presidential race is looking much tighter than it did just a few months ago.”

” ‘Roughly until the fall of 2003, voters’ high regard for Bush’s handling of the terrorism challenge pulled up their assessment of the handling of the economy despite low levels of consumer confidence. Since then, their negative assessment of his handling of Iraq has tainted their approval of his handling of the economy despite an improvement in their view on the economy,’ says Tom Gallagher, an analyst at economic-research firm International Strategy & Investment in Washington, D.C.”

“This confluence serves to create great uncertainty about Mr. Bush’s shot at a second term. After all, it’s a lot easier to push through a tax cut than to control geopolitical events. And again, the market hates uncertainty — especially about a president who’s given the market so much juice. But, that’ll all be over in November.”

“Fears about rising interest-rates are also scaring some folks off, but they shouldn’t be. Some think the central bank will opt for quarter-point increases at its meetings throughout the rest of the year, bringing the fed-funds rate to 2.25% by the end of the year. Others think the Fed will have to be more aggressive to ward off inflation, though that’s a less common view.”

http://online.wsj.com/article/0,,SB108566062478522872,00.html