Kevin Schmidt, executive vice president of the private client group at City Securities Corp., said most of the bad news has emerged from the housing, airline and finance debacles, which suggests investor sentiment will begin to turn positive.
"Psychologically, we are in a funk," Schmidt said. "It's not as bad as everybody thinks. The overreaction to the negative has happened."
Schmidt ticks off several reasons why he believes a turnaround is imminent:
-Many companies are making attractive profits. Pfizer, AT&T, Amazon and General Dynamics are just a few reporting earnings that, while perhaps not at record levels, still are strong.
-Stock investors who fled to the stability of Treasury bills will return to equities. Five-year Treasuries are yielding only 3.3 percent at a time when inflation is significantly higher, meaning investor capital is eroding in relative value. As soon as investors see markets showing strength, they will come off the sidelines and bid up the price of stocks.
-Equity markets, which have been in a long-term funk, will swing back to favor. The Standard & Poor's 500 has returned only 3.5 percent annually for the past decade - worse performance than during the Great Depression. "That's not going to go on forever," Schmidt said.
In fact, Schmidt thinks the bottom might have hit last week, when the Dow Jones industrial average hit 10,962 on Tuesday. The Dow has gained more than 600 points since.
Schmidt advises watching the tenor of financial news for signals that show the bottom has passed. When the news no longer is dominated by negative reports, momentum already will have started shifting toward growth in equity markets.
Don't wait for rosy news, he advises. Simply watch for banks reporting modest earnings and for housing starts to be flat, not down.