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Investing at an Inflection Point

From Standard & Poor's Equity Research

Few investors were surprised on Wednesday, when Fed Chairman Ben Bernanke decided to leave short-term interest rates unchanged at 5.25%.

Although recent inflation data have been benign, the overall economic picture is far from clear. Nevertheless, S&P Economics believes the Fed is through tightening, and we look for the first rate decrease by the middle of 2007, as members of the Fed collect more data suggesting that economic growth is slowing.

S&P Equity Strategy advises emphasizing high-quality stocks and/or those that offer solid dividend yields.

There have been eight interest rate plateaus -- periods between the last rate hike and the first rate cut -- since 1974, each lasting seven months, on average. During the plateau periods, the S&P 500 index has gained an average of 3%, rising four times and falling four times.

But how have the individual sectors fared? S&P Equity Strategy studied each of the eight periods to determine how industries within each sector performed on an evenly weighted basis.

Sector performance during interest rate plateaus, 1974-2006

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