Better Prospects for Stocks

Why this is a good time to put some reserves to work

By Arnie Kaufman

The market tone is better. Buying on dips is in evidence once again and disappointing news generally is being handled well. A willingness to take on risk is starting to emerge.

But confidence won't return overnight. The battering in 2000, especially in tech stocks, was too dispiriting. Investors' hopes were raised by good-looking Nasdaq rallies at least five times from May to December 2000, only to be thwarted by slides in the index to lower lows.

This time around, though, Fed monetary policy is accommodative rather than restrictive. And continuing low inflation gives the central bank the room to act aggressively if necessary.

The cycle, moreover, is further along. The economic valley that everyone knew lay in the market's path is already in the process of being traversed. Near-term shortfalls in corporate profits should give way to stronger earnings in the latter part of this year.

Also, the market downtrend in 2000 has brought stock valuations back to earth. The S&P 500's 10% decline and 9% earnings growth for the year lowered the P/E 17%. Many Nasdaq stocks saw their multiples halved.

The indicators relied on by S&P technical analyst Mark Arbeter suggest the market is turning the corner. Because major tech stocks are still in base-building patterns, however, Arbeter expects Nasdaq action in the period ahead to be positive but choppy.

We are raising our recommended stock allocation to 65% from 60% and lowering cash reserves to 10% from 15%. The bond portion remains unchanged at 25%.

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

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