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Keep a Positive Approach

By Arnie Kaufman We're not surprised the market is recovering haltingly, with the occasional return to favor of defensive issues. Confidence is bound to be fragile in the midst of a considerable economic slowdown, as the bridge is crossed from boom to sustainable progress. Adding to anxieties are fresh memories of a 55% plunge in Nasdaq and tech stock valuations still well above historical norms.

An irregular type of recovery may even be something of a plus right now. Skepticism at the outset of a market upswing can help the advance gain traction. The surge on the news of the Fed's early-January rate cut was immediately retraced.

In addition, a dramatic market rise would make the Fed less inclined to ease monetary policy aggressively, for fear that business and consumer spending would be re-ignited before the inflation threat is truly dampened.

As more and more corporations report December-quarter earnings and forecast near-term results, it's obvious that business conditions have deteriorated significantly. In early December, our analysts were projecting operating earnings of 57.70 on the S&P 500 index for 2000 and 62.90 for 2001. They're now looking for 55.73 and 59.08, respectively.

Indications are, however, that growth will pick up as the year progresses, aided by lower interest rates. S&P chief economist David Wyss anticipates a fed funds rate of 5% by summer, down from 6% currently and 6.5% at the start of the year. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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