An Enduring Rally?

The strong move in stocks reflects increasing confidence about the economy and corporate profits

By Joseph Lisanti

The S&P 500's strength this year has been encouraging. While it's too early to call the start of a new secular (long-term) bull market, the current rally is showing signs that it could represent the initial stage of a new cyclical bull market.

The rally started on March 12, when the index hit its low for the year, and it already boasts a much longer duration than any of the last three run-ups of more than 20%. But this rally is not only distinguished by its length. It also has breadth. A significant 484 issues in the S&P 500 posted gains, more than 10% higher than in any of the last three rallies.

However, many investors are still sitting on the sidelines. Volume on the New York Stock Exchange has been light, says Standard & Poor's chief technical analyst Mark Arbeter. He says the market usually sees higher volume in the early stages of a new bull market. Volume on the Nasdaq, however, has been very high.

A somewhat rosier economic outlook and forecasts for strong growth in corporate profits in the third quarter are contributing to the optimism—and may bring more investors in. We expect top-down operating earnings on the "500" to be 14.34 in the third quarter, up 4% from the second quarter. By 2004, profit growth will really pick up; our forecast is for operating earnings growth of 14.5% for the index in 2004.

Recent economic news has been distressing. Consumer sentiment fell, and retail sales, while rising, are not increasing as fast as some economists expected. And while the nation's unemployment rate fell to 6.1% last month from 6.2%, initial jobless claims for the week ended September 6 jumped to 422,000. That's the second consecutive week that the indicator registered above 400,000.

Still, we believe the trends are in place for a strong economic and market recovery, and recommend keeping 60% of your investment assets in stocks.

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

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