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Poised for Recovery

By Arnie Kaufman The market doesn't need a lot of good news at this stage, just relief from the pervasive gloom and doom of recent months. A jump-start could come from the covering of positions by the large contingent of traders who have been selling short and otherwise betting against stocks, while longer-term investors seem to be waiting for any reasonable excuse to put some of their expanded cash reserves to work.

Behind this restlessness is historical evidence that monetary ease leads in time to economic improvement, and that in between, stocks start to rise.

It was only January when the Fed began pushing down rates. S&P chief economist David Wyss says it takes nine months to a year for the easing to really bear fruit, and that housing, traditionally the first sector to be helped, has already seen benefits.

Wyss points out that when the economy was growing too rapidly in 1999 and the early part of 2000, doubts spread about whether the Fed could rein things in. Yet, a year after a tightening policy was instituted, a slowdown was evident.

This time around, moreover, Fed easing, which probably isn't yet over, will be augmented by tax rebates and cuts. Also, energy prices, while difficult to predict, have been coming down lately, which will give consumer purchasing power and business profit margins at least a temporary boost.

Stocks' p-e ratios are above average. But that's typically the case at earnings troughs and when the underlying pace of productivity growth is elevated.

High potential liquidity is another reason valuations should remain above the historical norm. The large numbers of baby boomers, now in their peak earning years, are building up sizable balances in their 401(k) plans. Though currently allocating those funds somewhat more cautiously, they continue to see stocks as the way to achieve a secure retirement.

We at S&P believe a policy of selective accumulation is justified. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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