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Economic Recovery to the Rescue

By Arnie Kaufman Corporate accounting and earnings quality issues, high p-e ratios and fear of additional terrorism remain a drag on the market. Another restraint: Dynamic leadership is absent and may not be seen until signs of improvement in information technology spending breathe new life into that deeply depressed sector.

But barring dramatic new financial irregularity disclosures, the chances are good the market will soon start moving forward again. The driving force, we at S&P believe, will be an improving economy.

S&P chief economist David Wyss feels that if inventory rebuilding accelerates sharply in the period just ahead, it is possible the first quarter will show strong GDP growth and the second quarter a relapse into negative territory. He points out that the 1990-91 recession was the only one since the 1950s that did not have a positive quarter sandwiched between down quarters. Wyss thinks the more likely scenario, however, is a smoother pace of inventory accumulation and rising quarter-to-quarter GDP growth through 2002. This forecast implies upward-trending earnings this year and next.

Investors, burned badly by the 2000-2001 bear market, are in a show-me state of mind. Short sellers and others who bet stocks will fall have become bolder lately, and institutions have been moving cautiously. All of this suggests that a good deal of fuel for an advance exists.

It wasn't a good omen that the S&P 500 index slipped in January, losing 1.6%. As mentioned a week ago, of the 19 times in the postwar period that the "500" has fallen in January, the index then went on to score a gain for the full year only seven times and suffered a loss for the year 12 times. That was against a backdrop of 2.4 up years for each down year for the 56 years from 1946 through 2001.

On the other hand, a decline in the S&P 500 this year would be the third in a row, and that hasn't happened since 1941. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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