The stock market rallied nicely in July after reaching the bottom of its recent range. Incoming data remains mixed but indicates that the economic expansion continues. However, risks remain elevated. The Federal Reserve downgraded its view and is discussing how to combat possible deflation, while federal and state governments continue to grapple with budget issues. Chinese growth has slowed, but the stock market is providing some positive indicators. Central banks around the world are creating a muddied picture.

The Fed isn't yet ready to raise interest rates, even though doing so could be beneficial. Raising rates would give savers a bit of a return in money market-type vehicles, potentially spur those now on the sidelines of the market into action, and give the Fed some wiggle room down the road should it need to slash rates again.

The current high correlation between stocks and bonds has only two historical precedents - periods when deflation was a reality, or when it was a fear. Low inflation is the reality today, but worries about deflation have still wreaked some havoc on markets. The latest rally may be based on a combination of waning deflation risk and the lessened likelihood of a double-dip recession.

Bulls and bears both have strong cases. With earnings results and economic data indicating continued growth, we lean toward the bullish side?although risks to the bullish case are elevated. Uncertainty and concern regarding government actions continue to weigh on sentiment, while the Federal Reserve leaves all options on the table. Some questioned the credibility of European stress tests, but the market responded favorably. Meanwhile, China's growth appears to be moderating but remains relatively robust.

Double-dip recessions are historically rare, but fears about them are less rare. One key indicator has flashed a recession warning, but several more tell a more positive story. Investors need to be objective, not emotional, when reading the economic tea leaves.

The Federal Open Market Committee surprised no one with its decision to keep the Fed funds target rate in a range between zero and 0.25 percent, where it's been since December 2008. The new statement marked the first time since the economic recovery began last summer that the Fed had to slightly dial back its language about the pace of the recovery. Stocks rallied immediately after the announcement, but in light of rampant intraday volatility lately, it's way too soon to judge if there will be any longer-term impact.

A 'square root' recovery is the most likely scenario: a V-shaped initial recovery followed by a flat-line period of growth. With the peaking in the US leading indicators in April, a likely double-dip in the euro area, slowing growth in China and rising US taxes, the beginning of a soft patch for the economy is likely upon us. This next phase has been accompanied by heightened volatility, a characteristic that is unlikely to go away. However, the current rally off the recent lows has legs.

Views on the S&P 500 sectors.

The wall of worry is back - and that's not a bad thing. Thanks to the correction, valuation has improved, while excessively bullish sentiment is no more. Growth estimates should be pared back for the second half of this year and next year, as well. Europe's debt crisis has become a deflationary event. The Treasury yield curve presently predicts the risk of a recession this year or next, however, as near-zero. The most likely shape of the recovery continues to be a 'square root,' with a V-shaped recovery followed by a leveling out of growth.

The US Senate approved legislation overhauling the regulatory structure of the financial industry?the most sweeping reform of the sector since the Depression. House and Senate negotiators must now reconcile differences between the newly passed Senate bill and the one that passed the House late last year, but lawmakers are shooting to send a final bill to President Obama for his signature by July 4. Key features of the bill are outlined, from a new consumer financial protection agency to significant reform of the credit-rating agencies.

Volatility in stocks has increased during the past several weeks as investors have grappled with numerous global concerns. Is this the start of a longer-term problem or is it just a short-term phenomenon? Developments in the housing and job markets hold the key to further economic improvement. Meanwhile, the European debt crisis was addressed with a massive package, but long-term issues remain, and China's rapid growth rate could lead to overheating and inflation.

Market volatility has heated up during the past couple of weeks as more eyes have turned toward the debt problems plaguing Europe. After a nice run in equities, it's certainly not surprising to see some sort of pullback, especially in areas of the market that may have outperformed to start the year. The United States is entering a time of more-steady growth, with flattening leading economic indicators, which typically represents a shift in sector leadership. The information technology sector, for example, should outperform the market, while materials should underperform.

The same leading indicators that warned of the recession in 2007 have been recently pointing to a strong recovery in the United States and globally. Ignoring them in late 2007 and again in early 2009 were both mistakes, particularly from an investment perspective. Concerns over Greece and contagion gave the market some indigestion last week, but a period of consolidation was not unexpected given prior market strength. Overly bullish sentiment (a contrarian indicator) still needs some working off, but the technical underpinnings for the market remain healthy.

The stock market has absorbed numerous body blows recently, but continues to chug along?waiting for a big price correction to buy could be detrimental. Economic data remains solid, confounding some recovery skeptics and providing the Fed ample reason to slowly return to normalcy. European debt problems are growing and concerns over contagion are rising; there's no quick fix, and some politically unpopular decisions are going to have to be made.

The Federal Reserve continued its recent pattern of holding short-term interest rates relatively steady, while cautiously upgrading its economic outlook. Kansas City Federal Reserve President Thomas Hoenig again dissented. It is possible that economic uncertainty in Europe pushed the Fed to keep the status quo. Greece continues to make headlines with its debt problems, and there are growing concerns of possible contagion. Standard & Poor's recently downgraded the debt ratings of Spain and Portugal to junk status.