Accumulation Advised

Don't chuck the umbrellas yet, but the skies have brightened

By Arnie Kaufman

With inflation low and the dollar strong, the Fed has the room to lower rates aggressively to keep the economy out of recession. S&P chief economist David Wyss expects the central bank to continue to take full advantage of this leeway, a clear plus for the market.

The timing of last week's inter-meeting fourth half-point cut in the fed funds target since January was designed to have maximum impact on business, consumer and investor confidence. As stocks were already enjoying a bit of a tailwind, the central bank's action sent them soaring.

Profit taking occcurred, as was to be expected. But it was absorbed reasonably well, aided by rare positive earnings surprises from a few bellwethers.

The market had looked "sold out" even before the latest rate cut, and was able to advance modestly in the face of a projected steep profit shortfall and massive inventory write-down at Cisco Systems. Apparently, the contraction in information technology spending had been sufficiently discounted via the many broad sell-offs as one after another of the tech leaders lowered their sights in recent months. S&P chief technical analyst Mark Arbeter, though encouraged by the bounce, believes that the advance will soon run into overhead supply (higher prices prompting sales by investors seeking a second chance to get out).

Nevertheless, it seems that the worst is over. The basic strengths of the economy will re-emerge before long, and the efficiencies and controls instituted by many companies during the slump will produce ongoing benefits.

We continue to recommend bargain hunting.

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

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