A Good Time to Hunt for Bargains
By Arnie Kaufman
More bad earnings news is to be expected. Corporations, particularly in the technology and telecom sectors, have been adjusting to a capital spending slowdown, with orders weak throughout the supply chain. Revenues have been falling short of targets, and despite aggressive cost cutting, margins have been shrinking.
We at S&P believe, however, that the economy is about to strengthen. Our view is that, while improvement will be gradual, the quarter just ended marked the low point in terms of GDP growth.
Some fear that consumers, who remain in a buying mood despite their shrinking portfolios, will eventually fall prey to the confidence crisis that has afflicted corporate managers. We don't think that will happen, thanks to interest rate and tax cuts. We expect the fed funds rate target to be lowered by 50 basis points at the May FOMC meeting and another 25 basis points soon after. We see $60 billion in tax reduction in the second half.
The biggest concern now is corporate earnings. So, signs that the economy is beginning to accelerate would be good for stocks, even though that would prevent earlier and greater Fed easing and push up bond yields.
Market rallies lately have been increasingly pathetic. Psychology has become so poor that it has to be assumed that most investors inclined to sell have already done so. Also, traders utilizing short sales, put options and the like to bet on further declines in stocks are now a major force in the downtrend. They tend to become more aggressive during quarterly earnings reporting seasons. But when the bears are out on a limb is just when a pop would have the best chance of routing them, finally bringing long-term investors out of their shells and enabling a rally to gain traction.
Whether or not a turn is imminent, we feel that, before long, today's prices will be looked back upon as attractive.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook