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Struggling to Gain a Foothold

By Arnie Kaufman The market was thrown yet another curve last week in the form of a round of poor economic news. The fear now is that the long bear market is finally taking its toll on consumer spending and will put the economy back in recession.

S&P chief economist David Wyss believes such a dire scenario is unlikely. He is currently looking for a roughly 3% rate of GDP growth for 2002 (fourth quarter of this year over fourth quarter last year), compared with his previous forecast of a 3.8% rise. He rates the chances of a double-dip recession as only one in three. Wyss expects operating profits on the S&P 500 to rise 15% this year and another 15% in 2003. (Our analysts are projecting larger gains.)

There's a good chance, in our view, that the emotion-charged nosedive in stock prices recently, as weakness fed on itself, made adequate allowance for this tempered economic forecast. Even if earnings estimates have to be shaved somewhat more in the period ahead, the 48% slide in the S&P 500 and 76% plunge in the Nasdaq Composite from the March 2000 highs to the July 2002 lows not only corrected earlier excesses but also left some room for disappointments.

While we think the lows of July 23 will probably hold, a sustainable upswing may take a while to develop. What the market needs is a spell of strong gains on heavy trading volume to attract sidelined money and give a recovery some traction. Indications are that institutions, after testing the water, pulled back last week, and renewed weakness of the dollar on the U.S. economic disappointments apparently is giving foreign investors pause once again.

For now, continue to move slowly. We suggest concentrating on defensive issues. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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