"Dramatically oversold positions"
Some equity analysts believe that the stock market is in an oversold position. They suspect that the market could potentially head a little bit lower in the early part of next week before bargain hunting commences. Corporate earnings announcements this past week were not really worse than expected. However, many companies are giving cautious earnings outlooks for the second half of the year. The Dow Jones Industrial Average closed at its lowest level since October 1998.

A handful of economists are suggesting that the stock market's excessive drop is pointing to the possibility of recession. While there is no question that the stock market is a pretty good leading indicator of the economy, it has also given misleading signals. On more than one occasion, the market has dropped while the economy has continued to rise. As long as layoffs don't increase rapidly and consumers are still working, still earning money, they will continue to spend. But some analysts fear that the collapse in equity prices will translate into a very significant negative wealth effect. It is certainly possible, but keep in mind that many more consumers have housing investments than equity investments and the housing market is still appreciating.

If not stocks, then bonds...
Even though the stock market was in a free fall this past week, bond prices showed relatively little movement in contrast to a few weeks ago. On Friday, though, the Treasury market rallied as the Dow Jones Industrials lost about 400 points by the end of the session. According to bond market analysts, the declining foreign exchange value of the dollar will limit how much the Treasury market can rally. Bond investors view a weak dollar as inflationary.