See Further Irregular Recovery

Stocks should continue to work their way higher, despite constraints

By Arnie Kaufman

Although corporate news will remain poor awhile longer and seasonal influences won't help, we at Standard & Poor's believe stocks can continue to move upward. Aggressive Fed easing usually succeeds in pulling the economy out of a slump. Equities generally anticipate improvement in the economy and in companies' earnings by several months. And history shows that gains in the earliest stage of a market upswing can be sizable.

S&P chief economist David Wyss looks for essentially no GDP growth this quarter. But he expects decent gains in the second half, with the timing of tax rebates determining which of the next two quarters will be stronger. Wyss sees a further quarter-point drop in the fed funds target at the Federal Open Market Committee meeting June 26-27.

Contrary to popular belief, the summer has not been a time of significant market rallies. A study by S&P investment strategist Sam Stovall reveals that in the last 30 years, the S&P 500 has lost an average of 0.1% per month for the three months July, August and September, compared with an average 1.1% per-month rise the rest of the year. Nevertheless, 2001, with its plunge to a bear market low in early April and its 2.5 percentage points in fed fund rate cuts so far, is not a typical year. We believe the market upswing can be extended.

The advance, however, is unlikely to be steady or swift. While traditional economically sensitive issues and small- and mid-cap value stocks should continue to climb, the technology and communications leaders, which are heavily weighted in the market indexes, will be restrained by continuing weakness in capital spending and substantial overhead supply of stock for sale.

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

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