Market Action Encouraging
By Arnie Kaufman
Many investors have had their faith in stocks shaken so badly during the bear market that they're jumping at opportunities to get out. That's restraining the recovery.
Confidence, nevertheless, is gradually improving. The major indexes are beginning to trace a pattern of rising peaks and troughs. If this continues, it would suggest that selling into strength is no longer a profitable strategy and buying on dips is again the way to go.
While corporate news remains poor, stocks are being given the benefit of the doubt now, mainly because of the highly accommodative Federal Reserve. The central bank has signaled it will do whatever is necessary to get the economy back on a strong growth path.
Standard & Poor's chief economist David Wyss believes gross domestic product (GDP) growth will be slower for the current quarter than for the first, which he expects to be revised downward from 2.0% to 1.4%. But thanks to tax cuts, he's looking for more pronounced progress in the second half.
Given the current economic slump and pressure on profit margins, S&P analysts now estimate a 5.7% decline in earnings of the S&P 500 for 2001. On this basis, the "500" carries a price-to-earnings ratio of 24.3, more than one and a half times the 1928-2000 average.
S&P feels, however, that premium stock valuations are justified. One reason is the possibility of a strong rebound in profits in 2002. Another is that either business cycles have moderated naturally or the Fed has gotten better at managing the economy. Whereas soft landings used to be a rarity, lately they've become the rule. Productivity growth has accelerated, despite the first quarter's dip, and expansion of the global middle-class consumer market is continuing at a healthy pace.
S&P believes that a positive investment approach will work out well.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook