WASHINGTON — U.S. stock investors applauded Federal Reserve Chairman Ben Bernanke's reassuring speech Friday, but many potential buyers are still sitting on their hands.
Bernanke's message was that the central bank has tools at its disposal to spur economic growth, and at their meeting next month policymakers would assess the toll that stock market weakness, debt-ceiling negotiations and the European debt crisis have taken on the U.S. economy.
Stocks traded higher Friday after Bernanke's speech in Jackson Hole, Wyo., and continued Monday with more robust gains.
Is the market's recent rally sustainable? That depends on whether the upward move is simply profit taking, or if it's an early sign that investors are gaining enough confidence that recession can be avoided and corporate earnings will grow to shift money out of gold, Treasury bonds and other safe havens and take more risk with stocks.
To be sure, the risk of recession is above normal. The U.S. economy is weakening at an accelerated pace, based on the latest data from the Economic Cycle Research Institute.
But the stock market is a forward-looking mechanism, and part of the reason for stocks' swoon this summer was due to investors repricing equities to better reflect corporate earnings growth expectations. That reassessment may not be finished. September has been the worst-performing month of the year for the Dow and the S&P 500 since 1950, according to the Stock Trader's Almanac. So it may be awhile before buyers spy a bit of sunlight through the clouds.
So, what do investment professionals need to see in the economic and political climate to put more money into stocks? Here are five potential catalysts:
The U.S. deals with its debt crisis: The debt crisis that caused rating agency Standard & Poor's to strip the U.S. of its triple-A Treasury rating is the first fundamental burden on the equity market. It would provide a relief to the market if the newly created congressional "super committee" tasked with cutting the U.S. budget deficit could reach a bipartisan deal providing a long-term map for how the U.S. will resolve its budgetary problems.
"If the committee comes up with something that shows the Democrats and the Republicans are able to get together and compromise, that will be treated favorably by the market," said Lewis Altfest, CEO and chief investment officer at Altfest Personal Wealth Management in New York.
Europe resolves its own debt TROUBLE: Concerns over the eurozone's ongoing debt crisis are also weighing on U.S. stocks. The sovereign debt crisis in European countries like Portugal, Ireland, Italy, Greece and Spain has negatively affected banking and sent shock waves across the region.
"On the fundamental level, we'd have to see some kind of greater leadership on the political side, in terms of allaying some of the worst fears throughout Europe with regard to the very fragile situation that exists with Europe's heavily indebted banks," said Frank Barbera, executive vice president at Sierra Investment Management in Santa Monica, Calif.
Retail sales strength improves: Firm retail sales in August would encourage the market at least on a short-term basis, Altfest noted.
"If August retail sales turn out to be strong, it would mean that people are looking past the credit downgrade and the fears of recession and they're going about their businesses," Altfest said. "That would be very positive and would result in a strengthening of stock prices."
Gold, Swiss franc weaken: A decline in the value of gold and the Swiss franc would be another upbeat sign for the stock market.
As a measure of fear, gold has been soaring in price, driven up by investor concerns over the U.S. and Europe's economies.
If gold prices start to move south, that would suggest greater comfort with the economic environment and a willingness to take higher risk, which would be positive for stocks, Altfest said.
The same would be true of weakness in the Swiss franc, another safe haven. "If that were to start to weaken, I would say 'Okay, the market is taking on a better tone,' " Barbera noted.
Bank stocks strengthen: Warren Buffett's $5 billion lifeline to troubled Bank of America last week seems more of a bet on the company than on the banking sector as a whole.
The financial services sector is the U.S. market's worst performer so far this year, and Buffett's support for B of A and Wells Fargo doesn't change the fact that a large number of investors do not view the nation's biggest lenders as undervalued bargains.
It will likely take a long time for the banking sector in both the United States and Europe to unwind its problems.
But financial services stocks nowadays are an area for investors who go against the herd, and who show the ability, as Buffett has said, to "be fearful when others are greedy and be greedy when others are fearful."