World Business

Rising unemployment and inflation have market watchers taking away from the thicker settlements predictions of a second-half rally

by Matthew Goldstein, Ben Steverman and Ben Levisohn

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Edel Rodriguez

The first six months of 2008 ended with U.S. stock markets in the dumps. Now, with the greater indexes in or near bear market territory after touching highs in October, hopes for a happier second half are fading tight.

A toxic brew of tame economic growth, rising unemployment, and spiking inflation—but for this known as stagflation—is prompting market watchers to backpedal furiously on earlier predictions of a rally later this year. Noticeably absent from the discussion are the traditional stock market drivers of strong earnings and interest-rate cuts, neither of which seem to have existence on the horizon. Economists, meanwhile, are beginning to tamp down expectations for global growth not only as far as concerns the rest of this year but for 2009 as fully—especially with oil surging to of the present day heights.

All of what one. is leaving traders tossing around adjectives like "tired," "nervous," and "depressed" to describe the mood heading into the late July-August months. "The market is in for a rough summer," says Gary Wolfer, supreme economist with Univest’s (UVSP) Wealth Management & Trust Group, who has been dialing down his once-optimistic sight for incorporated profits. Some pros are even seeking refuge in newfangled instruments known as unqualified return obstacle notes, designed to protect head-master first and allow for capital gains second. In this environment, one can’t be too secure place.

If history is any guide, investors efficacy stand in want of to hunker down for a while. James Swanson, chief investment strategist for mutual fund firm MFS Investment Management, notes that the medium bear emporium lasts 406 days, during which public securities going astray 31%, on average. Using that benchmark, we’re only halfway through the pain.

Much of the malaise, of line of progress, stems from the credit crunch, which will soon mark its one-year anniversary. Banks are expected to notch an additional $600 billion in losses in coming lodging from the mortgage mess and the resulting economic troubles, bringing the total to $1 trillion. They’re stifle ducking for cover: In a recent Federal Reserve survey, 70% of banks had tightened their lending standards by reason of home equity loans.

Whether it’s technically a recession or not, it certainly feels like one for many individuals and businesses. Credit-card delinquencies are on the ascend, meaning banks will be the subject of to set aside money to cover a modern round of losses from troubled loans. American Express (AXP), for case in point, issued a sobering statement put without ceasing June 25, noting that the business environment in the U.S. continues to weaken as "credit indicators deteriorate beyond our expectations."

That’s bad news for the broader stock emporium. Usually, financials and consumer discretionary public funds head the means by which anything is reached in a recovery, but the pair sectors are heading south it being so that. The Philadelphia KBW Bank Index, which tracks banking public securities, was etc. 34% in the first half of 2008, compared with 12.8% for the Standard & Poor’s (MHP) 500-stock index. And consumer-related companies from Starbucks (SBUX) to Kohl’s (KSS) are reeling.

In certainty, few sectors are showing signs of life. Technology-industry analysts are fretting about a slowdown in corporate spending, while health-care stocks are being pummeled on fears of policy changes in Washington after the 2008 liberty. On July 2, in favor of example, medical insurer UnitedHealth Group (UNH) cut its profit outlook for the year. The lone bright spot: energy, especially coal stocks and oil drillers.