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Sitting on the Fence

By Joseph Lisanti The prospect of war has made Americans more pessimistic about the economy. So far, however, they have not made a conscious decision to cut back spending. February's retail sales, down 1.6%, appear to have been greatly distorted by bad weather over the President's Day weekend. And while individual investors have shown no great desire to buy stocks, neither have they dumped them indiscriminately.

The U.S. National CASH (Consumer Attitudes and Spending by Household) Index, published by global research company Ipsos-Reid, stood at 61.4 last week vs. 100 in January 2002. Over that period, the weakest item in the survey has been "local economic expectations," which declined 19.9 points, while consumers' comfort level about major purchases has slipped only 0.8 point. Confidence in investments has held up fairly well, dropping only 2.3 points.

In short, Americans have a general feeling of unease about the economy, but are willing to spend and generally have a wait-and-see approach to stocks. Much of the unease relates to the possibility of war in the Middle East. Any apparently positive news (or even a plausible rumor) on the international front is cause for a brief rally in stocks. The strong advance last Thursday is a good example. These bursts of optimism help explain why stocks have approached the lows of October but haven't broken through. We continue to believe that a resolution of the Iraq situation will cause stocks to bounce.

Nevertheless, the lack of buying interest has taken its toll so far this year. The first month of the year usually is good for stocks, but since 2000, only one January has been positive. In January of this year, 335 S&P 500 stocks declined, more than in any January since 2000, when 367 fell in price.

So far in March, the "500" is down slightly. But if this month brings an end to geopolitical uncertainty, stocks should benefit. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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