- At present, there is a sharp debate between the holders of the bullish and bearish views of the stock market. The bears are convinced that consumers are burdened by debt and will be unable to spend, the banking system is dysfunctional, the real estate market remains in a free fall and higher taxes and government action will depress valuation levels.

- The bulls, on the other hand, believe that a global inventory upswing is beginning, reflation policy has taken hold, the housing market is bottoming, the recovery in emerging markets will drive global growth and bearish sentiment has already been discounted by the markets.

- In our view, both of these arguments have some degree of validity. Last week’s correction could result in some increased pessimism among investors, and we expect volatility in both directions to remain high.

- Market corrections are a normal part of bottoming processes, but we do not expect to see a repeat of the market conditions that existed in January and February. That last significant down leg was driven by fears of an outright collapse in, and possible nationalization of, the banking system; uncertainty over government policy; and a seemingly never-ending string of bad economic data.

- It seems clear to us that conditions have improved since then, and we reiterate our view that a year-end target of 1,000 for the S&P seems reasonable, although we also acknowledge that the index may again see the 800 level first.

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