Don't Give Up On Market

S&P continues to believe that patience will be rewarded

By Arnie Kaufman

Market action remains frustrating. Repeatedly, rallies fail for lack of follow-through buying. It seems as though many investors, tired of being disappointed, have already placed whatever bets they are going to make that the Fed will successfully reinvigorate the economy. They are now sitting back and waiting for signs that the malaise is lifting. Little encouragement was forthcoming last week. The latest Federal Reserve beige book survey indicated the slowdown has spread, and chain store sales in July were sluggish. However, tax rebates have only recently begun to reach consumers, and Fed rate cuts (initiated in January) often take a year to start working.

S&P chief economist David Wyss still believes that the second quarter will prove to be the low point of the cycle. He expects GDP growth for that period to be revised downward to 0.4% from 0.7%, but forecasts modest improvement to 1.8% for the current quarter and a return to trend (historical average) growth of 3.4% for the fourth quarter.

Wyss looks for the fed funds rate target to be lowered by one-quarter point to 3.5% at the FOMC meeting on August 21. But he now feels that the alternative or second most-likely scenario has shifted from no reduction in rates to a half-point cut.

S&P chief technical analyst Mark Arbeter would not be surprised to see the market completing the second part of a double bottom in September or October and then moving upward. Should the S&P 500 and Nasdaq Composite drop below nearby support at 1165 and 1923, respectively, Arbeter would rate the chances of a test of the April market low as significantly greater.

Jitters are to be expected at this point of the economic/monetary cycle, and as the market flirts with its lows. Nevertheless, abandoning stocks now would be a mistake. We advise staying with a portfolio allocation of 70% equities.

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

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