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Seeds of Recovery Sown

By Arnie Kaufman We at S&P believe potential rewards justify the risk of putting some reserves to work now, ahead of an actual upturn in the economy and corporate profits. Waiting for tangible evidence of improvement in business conditions has in the past meant missing a good part of the market rebound.

S&P chief economist David Wyss believes roughly half of the $45 billion in tax rebates and cuts in the second half will be spent, providing a strong dose of stimulus. Moreover, the series of aggressive easing actions by the Fed began nearly six months ago, so their impact should soon start being felt.

Manufacturing capacity utilization in May was at the lowest rate in 18 years. That doesn't augur well for spending on capital equipment. Foreign demand for U.S. products also seems to be weaker than had been anticipated. But with the inventory work-down nearly over and consumer spending soon to get a boost, GDP growth in the third and fourth quarters should return to the vicinity of 3%. Corporate profits may start showing year-to-year improvement in the fourth quarter.

The recovery in the major market indexes since the early-April low has been limited by the types of stocks doing well -- small- and mid-cap value plays. The big technology issues, which do have the heft to move the capitalization-weighted indexes, have been held back by dismal earnings, overhead supply of stock for sale and end-of-quarter portfolio window dressing.

Looking out 12 months, we feel that the big-cap techs should post good percentage gains from their current deeply depressed prices. Our forecast is that the tech-heavy Nasdaq Composite Index will be some 30% above the current level at the end of June 2002.

For the immediate future, though, we would continue to favor well-positioned issues in the basic materials, consumer cyclicals and energy sectors. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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