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Caution Flags for Investors

From Standard & Poor's Equity Research

Here are the notes from the weekly Standard & Poor's Investment Policy Committee meeting, held Aug. 30.

Economic Outlook

Longer-Term Outlook: When housing prices start to soften, the first thought for the seller is to hold on longer and hope that he can eventually get his price. The supply of unsold new homes has risen to 6.5 months from 6.2 in June, and is the largest month-supply since 6.4 months in November 1995. Likewise, the month-supply of existing homes is at 7.3 months compared with 6.8 in June and 4.6 months last July. The inventory overhang is getting large, worsening the supply/demand balance, which signals further pressure on prices in the near term.

Market Outlook

Fundamental Outlook: The equity markets continue to get mixed signals. Bearish arguments include poor seasonals, slowing economic growth, and weakening housing, while attractive valuations, low investor sentiment and falling oil prices bolster the bull's case. We recommend a cautious approach, emphasizing large-cap, high quality issues in non-cyclical sectors. Even though a soft landing is expected, we think the risk of recession is increasing.

S&P's Asset Allocation

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