From the August 01, 2011 issue of Futures Magazine • Subscribe!

Are stock indexes experiencing Déjà vu?

Markets

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It has been another roller coaster year for stock indexes. In June, the Dow Jones Industrial Average opened 24% higher than on June 1, 2010, but closed the month with a lower high and lower low from May. The Dow began 2011 at around 11,600, rallied near 13,000 in April and May, and then dipped below 12,000 in June. Movement in the S&P 500 was similar, as the S&P was up 23% from June 2010 to June 2011. Surprisingly, these numbers are very close to the gains the indexes made this time last year. Further, the chart patterns are similar to a buildup for the first part of the year and a selloff in May and June (see "Sell in May").

Once again, analysts are split on where the indexes are headed for the rest of the year, with some saying the market will make decent gains on the year while others say we already have seen the top for 2011. With differing predictions come differing ideas on what will drive markets for the rest of the year.

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Similar to last year, recent economic reports and comments from Federal Reserve Chairman Ben Bernanke point to a slowdown in the recovery. In nearly every measure of the economy, Bernanke cited "economic downgrades" in his June press conference following the Federal Open Market Committee (FOMC) meeting where the Fed once again postponed an exit strategy from its long-term accommodative stance. In the press conference, he cut the Fed’s GDP projections for 2011 from 3.1%-3.3% to 2.7%-2.9%. "Part of the slowdown is temporary; part of it may be longer lasting. We don’t have a precise read on why this slower pace of growth is persisting," Bernanke said.

That slower pace is evident especially in the labor market where May and June non-farm payroll showed virtually zero growth. The Fed’s projections show the unemployment rate dropping to 8.4%-8.7% by year-end, but it has moved in the opposite direction since bottoming at 8.9% in March. "It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks, and in my view we can’t achieve a sustainable recovery without keeping inflation under control," Bernanke said in the press conference.

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