Yesterday’s close marked the end of the first half of the year in stocks. The Dow is down about 14.5% for 2008, the worst first half of a year since 1970. Many of you know the story: falling home prices, credit card, record high oil; a recipe for a fall in stocks. Looking ahead, what can we expect for the second half of the year?

The Coming Rate Hikes

Soon, the Fed will have no choice but to raise rates in order to combat inflation, namely rising energy costs. Crude oil has been on a run with no sign of stopping, today crossing $142 a barrel. Rate hikes should have an effect on oil prices as the U.S. dollar strengthens. How will rate hikes affect the economy and stocks?

When it comes to the economy, it could be bad. Home prices are likely to continue to fall with higher rates which could continue to depress consumer confidence. Remember, consumer spending is about 70% of the GDP.

Historically, the stock market has had tough times in a rate hike environment; however, it is tough to predict how the stocks will react to rate hikes in the current environment. It could be positive as the Fed strengthens the dollar and attempts to combat energy prices. Energy prices and inflation are eating away at earnings, so this could be a nice boost to stocks. No matter the reaction in stocks, the Fed needs to raise rates to strengthen our currency. Long term, we need a strong currency. It could be painful in the short term, but it would be worth it for the long run.

Meanwhile, expect the average consumer to continue to tighten spending. Even if the Fed drop-kicks energy prices and oil drops closer to $100, we would still be at $100 oil! High gas prices are and will remain high. We have a tightening job market and a stagnant economy. Fewer people have jobs and costs are up all over the board. Think about it. Spending is being affected. I have spent hours in Lowe’s and Home Depot in recent weeks, and both stores are dead.  Not a good sign.  Earnings will be lower and so will stocks.

I will be looking to buy UltraShort ETFs during any market bounce to short the broad market. I like SDS which double shorts the S&P. My recommendation? Have a large cash position or find strategies that can make money independent of market direction.  Good luck, you might need it.

Popularity: 11% [?]