Market Waiting for Catalyst
Sell-offs haven't been snowballing lately, as they had a couple of months ago. But the market tone has turned defensive. Though expecting improvement down the road, investors see no urgency to commit reserves in the midst of the parade of disappointing corporate profit reports and downbeat first-half forecasts.
Bad weather was more of a factor than thought in the dramatic economic slowdown in December, with January looking less dire. Some now assume the Fed will not have to ease as much as earlier expected. Doubts in this regard will persist at least until the release of February data.
S&P economist David Wyss is still looking for GDP growth of less than 1% in the first quarter, followed by a fairly strong recovery. As heavy lay-offs came so quickly, he feels a V-shaped cycle is likely. With inflation not a problem, Wyss believes the fed funds target will be lowered from the current 5 1/2% to 5% in March and to a low of 4 3/4% or 4 1/2% soon after.
Some improvement in corporate profits in the second half is widely anticipated. Stocks thus are being set up for a fall if it becomes apparent that companies will be unable to deliver. But by the same token, the premium in stock valuations that is attributable to the promise of the information technology revolution has been shrinking, probably excessively.
While obviously not immune to the business cycle, IT spending should grow strongly in the years ahead. That will keep productivity gains healthy and support a relatively high non-inflationary economic speed limit. Corporate profit growth should be correspondingly above trend.
The accommodative monetary policy, the likelihood of a broad tax cut and the substantial reserves on the sidelines make this a good time to be accumulating stocks.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook.