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Indications of Improvement

By Arnie Kaufman It's too soon for a chorus of "Happy Days Are Here Again," but some hopeful buying interest has been in evidence. While urgency to add to stock positions has been absent, prices have gradually been working their way higher. Bad news hasn't done as much damage. Failed rallies haven't turned into routs.

The road immediately ahead will remain difficult. We at Standard & Poor's don't see anything that would stampede those betting on lower stock prices into covering their positions, getting the recovery off to a running start. Without a breakaway for encouragement, longer-term investors will keep looking back to the many market disappointments of the past year and only guardedly commit additional funds.

The news will continue to be dominated by corporate profit shortfalls and analysts' stock downgrades. No strong leadership is emerging. And heavy overhead supply, shares that were bought at higher prices and could be dumped on the market on any advance, will remain an impediment.

What we believe will prove to be the trump card in the intermediate term, however, is the Fed's aggressive monetary easing. The four half-point cuts in the fed funds target since early January, which we expect to be augmented by another half-point reduction by summer, will have an increasingly stimulative effect on the economy starting in the third quarter and continuing into 2002.

With an accommodative Fed and substantial cash reserves on the sidelines, we believe that upside potential over the next six to 12 months outweighs downside risk. We're forecasting about a 9% rise in the S&P 500 from this point to yearend. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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