As the second half of the financial year gets going in earnest, what can we expect? A bursting home-price bubble? A rebound in stocks? Oil prices going even higher?

Obviously, no one knows for sure. The first half of 2005 was particularly humbling for forecasters. Just about everyone, for instance, thought interest rates would be higher by now than they are.

Stocks had a lousy first half, with the Dow Jones Industrial Average down 4.7 percent, the Standard & Poor’s 500 off 1.7 percent and the Nasdaq Composite down 5.5 percent. Most experts had expected modest gains.

Rates on the rise

Long-term interest rates had been expected to rise, as the Federal Reserve pushed short-term rates up. But although it’s driven those rates from 1 percent to 3.25 percent, long-term rates fell, baffling just about everyone.

Most surveys show the pros are not expecting great investment gains in the second half. Though the economy is doing fairly well and corporate earnings are strong for the most part, the worries of the past couple of years have not gone away.

There is the war in Iraq, the danger of a jump in inflation, the federal budget deficit and the trade imbalance. Then, of course, there are the geo-political issues that can trouble the markets – conflict with North Korea and Iran, Europe’s unification troubles …

Many experts apparently feel that stocks won’t do much until the Fed stops raising interest rates. As rates go up, it’s harder for stocks to compete as intermediate- and long-term bonds usually offer more generous yields.

While those yields have not gone up this time, they might suddenly start playing catch-up. Until it’s clear the rate-raising cycle is over, investors will be reluctant to bid up stock prices, according to this theory.

What about housing?

Soaring housing prices are another concern. If this stops – or, worse, if house prices fall – homeowners feeling less wealthy may cut back other spending. In addition, a jump in mortgage rates would cause homeowners to stop refinancing, causing this source of spending money to dry up.

Any reduction in consumer spending could hurt corporate profits and undermine stocks.

Oil prices have skyrocketed in the past year, topping $60 a barrel. Consumers spending more for gasoline and heating oil will have less to spend on other things.

Suppose, for instance, that globalization means there will be so many inexpensive goods that inflation will stay low for the long term. Interest rates would then be likely to stay low.

On the other hand, soaring demand for oil from China, India and other developing countries could cause oil prices to continue upward. Eventually, that would have to drive inflation up, wouldn’t it?

The strange behavior of the dollar also raises questions about fundamental worldwide change. Early in the year, just about everyone had expected the dollar to fall in relation to the other major currencies. Instead, it’s become stronger. Go figure!

Jeff Brown is a business columnist for The Philadelphia Inquirer.

E-mail him at brownjphillynews.com.)

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AP-NY-07-01-05 1859EDT