For investors, the second half of the year won't exactly be coasting.
Subprime mortgage concerns, speculation about interest rates and the early maneuverings of presidential campaigns will influence stock market psychology.
There is optimism about the economy and company profits. But it is tempered by the reality that a rambunctious stock market's stellar days are just as capable of sliding into a negative mind-set.
Mention the possibility of hurricanes affecting the energy pipeline or Asian markets experiencing a dramatic correction, for example, and the mood immediately turns somber.
A cautious strategy for the remainder of 2007 hopes for the best but doesn't rule out any potential turn of events. Larger companies in reliable fields are on the front burner.
"Not long ago, the stock market was reflecting on the chance of a Federal Reserve rate cut, and now there are expectations of a rate hike, but I personally don't think the Fed is going to do anything between now and year-end," said Alan Skrainka, chief market strategist with Edward Jones in St. Louis. "Inflation is a little bit up, but not so much that the Fed has to take action."
Subprime mortgage and housing market woes are "playing into the Fed's hand" by slowing the economy and relieving some of the inflationary pressures, Skrainka said. The economy will continue to grow and recession isn't looming, he added, though investors must remain on guard for a market correction.
"Heading into fall we'll have the full force of the early political campaign speeches and talks, with the stock market reacting to anything that sounds extreme," said Fred Dickson, chief market strategist with D.A. Davidson & Co. in Great Falls, Mont. "This can range from very populist rhetoric of wealth distribution and higher taxes all the way to ultraconservative talk, but will add up to market turbulence."
Subprime mortgages will remain in headlines as a negative economic driver, weakening housing, construction and employment at least through year's end, Dickson expects. The subprime crunch is slowing the economy by 0.5 percent to 0.75 percent on an annualized basis, he estimates. His market prediction is that the Dow Jones industrial average and S&P 500 index will be modestly higher by year-end.
A poster company for the second half of 2007 is Schering-Plough Corp., a turnaround situation benefiting from recent good fortune.
Its stock is recommended by Sam Stovall, senior investment strategist with Standard & Poor's Equity Research Services in New York, and Paul Nolte, investment director with Hinsdale Associates in Hinsdale, Ill.
While known for allergy and Hepatitis-C products, Schering-Plough is enjoying a powerful income stream from the popular cholesterol drugs Zetia and Vytorin, developed in a joint venture with Merck & Co. Its stock is up 30 percent this year, following last year's 14 percent gain.
The maker of a variety of health-care products isn't overly dependent on just a few drugs and doesn't face many near-term patent expirations. It has been working to improve efficiency and revive its lagging internally generated drug lines in a revitalization program put into place after some difficult years.
"My advice to investors is that the second half of the year will be good, but not great, with equities a better opportunity than bonds," said Stovall, who expects a fractional increase in the 10-year Treasury note yield and slight decline in the S&P 500 by year's end. "The stock market will be vulnerable for a pullback, so if you're adding to positions, do so in a cautious manner."
Because higher overall interest rates and a delay in the Federal Reserve's rate cut will pressure stock prices, he would buy only stocks with a proven track record of raising earnings and dividends.
Among the companies Stovall recommends that fit that description are consumer staple firms Colgate-Palmolive Co., CVS Caremark and Altria Group Inc. and the health-care firms Cephalon Inc., Laboratory Corporation of America Holdings and Zimmer Holdings.
"We are going to see a very chopping stock market in the second half of the year, with the potential for a sharp sell-off with high volume," Nolte said. "The best plays in the U.S. are in health care and some of the consumer stocks, while the REIT [real estate investment trust] market is going to have some trouble for obvious reasons."
Because of strong run-ups, utilities and telecommunications stocks are unlikely to continue their winning ways, Nolte said. Overall, higher energy prices and a struggling housing market will take a toll on the stock market in the second half of the year, he said.
Pharmaceutical firms Pfizer Inc. and Bristol-Myers Squibb Co., pacemaker manufacturer Medtronic Inc., brewer Anheuser-Busch Cos. and food company Kellogg Co. are stocks held in Nolte's client portfolios that he recommends for purchase.
Control what you can and avoid worrying about the rest, experts say.
"Investors can't control oil prices or Fed policy," Skrainka said. "My advice for the rest of this year is that investors can control the quality of investments owned, the diversification of their portfolios and their own emotions by maintaining a long-term view."
To Skrainka, industrial firms 3M and United Technologies Corp., financials Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. and energy giant Exxon Mobil Corp. are well-positioned for the second half of an uncertain 2007.
Andrew Leckey is a Tribune Media Services columnist.