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Patience Should Be Rewarded

By Joseph Lisanti Stocks continue to struggle in an attempt to right themselves. So far the blue chips have been doing a somewhat better job of recovering from their January decline than the Nasdaq issues. We believe such divergence will have to be sorted out before the post-election market advance can continue.

Meanwhile, investors do have some positive factors to focus on. With more than 85% of the stocks in the S&P 500 having reported their results for the most recent quarter, earnings generally have been better than analysts' expectations. We now project that 2004 operating earnings on the "500" will come in at 67.98, a new record, and estimate 2005 operating earnings at 74.31.

Many companies in the index are sharing more of their wealth with stockholders. Right now, 378 stocks in the S&P 500 pay dividends, up 7.7% from the end of 2002. We project the dividend payment per share for 2005 to total 21.80, up 12.1% from 2004.

The economy appears to be cooperating too. Although U.S. industrial production was flat in January, our economists believe that was largely the result of a 3% drop in utility production on warmer-than-expected weather. Manufacturing rose 0.4% during the month. Housing starts increased 4.7% in the first month of 2005 to an annual rate of 2,159,000, a 21-year high. And initial unemployment claims for the week ended February 12 fell to a four-year low. Although the core producer price index rose 0.8% in January, we attribute much of the advance to increases in tobacco and alcohol prices, and don't see the PPI continuing to rise this rapidly.

All of this suggests to us that the background for equities is fairly positive. We believe that once stocks regain their footing, prices will trend higher. Our yearend 2005 target for the S&P 500 remains 1300. We advise 45% in domestic equities, 15% in foreign stocks, 25% in short-to-intermediate-term bonds, and 15% in cash. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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