By Arnie Kaufman
Following seven gains in eight weeks since early October, the 3% pullback in the S&P 500 last week probably represents no more than a normal consolidation. Profit taking could continue a while longer, but we look for an upturn later this month and into January on year-end reinvestment demand, and we see solid net gains for the next 12 months.
We'd use setbacks to add to portfolios. Our recommended equity exposure is being increased to 65% from 60%, with cash reserves lowered to 20% from 25% and bonds remaining at 15% of the total.
Institutions, active buyers recently, seem to have decided to step back for now and not chase stocks upward, particularly in light of the President's tough talk on Iraq. We expect, however, that they will be buying again soon, thanks in part to the unexciting prospects of alternatives to equities.
We were disappointed by the rise in the November unemployment rate (reported last Friday) to 6% from 5.7%. But the jobless rate is a lagging indicator of economic activity. We continue to look for 3% GDP growth in 2003.
A more aggressive fiscal stimulus approach may result from last week's Bush Administration shakeup. The chances seem good for investor tax breaks, which could boost stocks. Among the possibilities is a corporate deduction for dividends paid or an exclusion from individuals' gross income of a part of dividends received. Many companies might then begin to pay dividends if they don't now and increase payments if they do, reversing a 25-year trend away from dividends.
The number of companies that pay dividends has already increased modestly, as the chart below shows. Of some 7,000 U.S. common stocks traded on the New York and American stock exchanges, on the Nasdaq National Market and the Nasdaq Small Cap, 39% currently pay dividends vs. 36% at the end of 2001 and 34% at the close of 2000. That's still a far cry, however, from the 72% of companies that paid dividends 25 years ago.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook