Second Half Is Looking Up for Stocks

But today, a real second-half comeback isn't such a sure thing thanks to creeping inflation and the depth of the housing bust. Both are hurting consumers. Instead, a short-lived rally is just as likely, if not more so, than a bull-market rebound. So what's the best place to put money in such a skittish recovery?

Between the Fed's rate cuts and the $117 billion in tax rebates landing in bank accounts, stocks could get at least a moderate boost in the coming quarters, according to Street economists and strategists. The market has already fallen about 20% from peak to recent trough, which is close to past median declines during economic slowdowns. And things have looked better in recent weeks. The S&P 500 is up 11% since hitting a 52-week low in March and the Dow Jones Industrial Average has gained 12% since its low in January.

"It makes some sense to assume a healthy bounce in the third quarter that overflows into the fourth quarter," says Fritz Meyer, senior market strategist for money manager Invesco Aim Management Group.

Tobias Levkovich, Citigroup's chief U.S. stock strategist, is predicting a "W-shaped market pattern" for this year, as he believes earnings expectations are still too high and will have to come down, disappointing investors and putting pressure on stocks.

But in the near term, Citigroup analysts Deborah Weinswig and Charmaine Tang say broadline retailers could outperform over the next two quarters, in part because of the tax-rebate checks. When the last round of rebate checks came out in 2001, about 40% was spent on clothes and accessories, they say. J.C. Penney (JCP) and Kohl's (KSS) are among their picks, since those companies' lower retail prices fit with a muted recovery. In addition, the retailers have already cut their first-quarter earnings estimates so that "the bad news is priced in." They expect J.C. Penney alone to get an added $150 million in sales over the second and third quarters from the tax-rebate checks.

The last time Washington handed out "free" money, consumer spending jumped almost 5% in July and August 2001, according to Merrill Lynch economist David Rosenberg, who expects the rebates to result in a modest boost to economic growth. But Rosenberg, like many economists, also says it's "far too premature to be predicting a sustained recovery."