Stocks may struggle to beat autumn blues

As trading volume swells after U.S. Labor Day -- for Wall Street, the official end of summer -- the well-tanned and well-rested will have to grapple anew with an ongoing credit crisis, a frustratingly uncertain economic outlook and a presidential race that's heading into the home stretch.

August marked the first monthly rise for the S&P 500 in three months. But because the gains were booked on thin trading volume, it looks hasty to say the selling tide has turned.

The real test, investors say, will come in September and October, typically the worst months of the year for the Dow industrials and S&P 500.

While stocks have staged some modest rallies this month, investors fear it's going to be tough for the broader market to shake its habit of underperformance in autumn.

For one thing, credit markets are telling an altogether different story. Credit spreads have widened even as much-maligned banking and financial stocks have bounced. What's more, the future for mortgage market linchpins Fannie Mae and Freddie Mac, the twin sources for much of the summer's rocky ride, remains highly uncertain.

"While equity investors are willing to look out toward better times, the bond market has concluded that loans will cost more and that fixed income securities held as collateral at many financial institutions are worth less," said Gordon Fowler, chief investment officer at Glenmede in Philadelphia.

"We are inclined to believe that the fixed income market may be a little more prescient in this case and that the stock market is going to continue to bounce along at relatively low levels for a while."

Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York, said investors who think banks are through with the worst of their credit-related write-downs, may be in for an unpleasant surprise in the third quarter.

"The comparisons (of year-on-year earnings) are getting easier, because the third quarter of 2007 was a disaster, and you'd think firms would be able to beat them, but they're not going to."