Look for Further Recovery

S&P continues to believe the market will work its way higher and end the year solidly above current levels

By Arnie Kaufman

Mixed signals from the economy are to be expected for a while. But S&P forecasts GDP growth at 2.5% for the third quarter and 3.8% for the year's final period, up from the 1.0% we see for the current quarter.

Though consumers could well retrench in the face of job cuts, we're betting they'll hang in and allow the economy to bridge the gap until manufacturing and technology begin to recover.

S&P research director Ken Shea notes that some optimism is creeping into comments from corporations in economically sensitive areas, particularly semiconductors. He feels that, in general, earnings expectations have been trimmed to the point where upside surprises may be just around the corner.

Another favorable sign is the recent nibbling by investors at Internet and telecommunications issues, which is an indication of willingness to take on risk again.

According to S&P sector strategist Sam Stovall, the market's near-term fate rests mainly with the bellwether tech stocks. In this regard, he's encouraged that the p-e ratio of the S&P tech sector relative to that of the the S&P 500 is just 1.2 to 1, lower than at four of the last five recession troughs.

Chart patterns of the major indexes have turned positive, in the view of S&P technical analyst Mark Arbeter. But he suspects we may see a month or so of backing and filling before the advance resumes, as stock bought during the strong January rally at prices above current levels represents potential near-term resistance.

We would take advantage of dips to add to stock positions.

Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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