Looking Across the Valley

S&P would stay with a constructive investment policy

By Arnie Kaufman

The recent dismal economic reports can be taken as a sign that the recession is at or near its nadir and doesn't have too much further to go. The irregular recovery in stock prices since Sept. 21 seems likely to continue.

Although corporations are operating in a defensive mode and consumers are now more cautious, a number of factors suggest improvement before long. Most important is the Federal Reserve's highly accommodative monetary policy. The lowest short-term interest rates in 43 years will pull the economy out of recession early next year, according to S&P chief economist David Wyss.

The initial rise in GDP may not be as pronounced as Wyss had anticipated, because the fiscal program now in Congress likely won't be as beneficial as he thought. Neither the corporate tax breaks being pushed by the Republicans nor the public works programs being peddled by the Democrats have much to do with the short-term stimulus we need, says Wyss.

However, the Treasury, intentionally or not, lent a helping hand last week by suspending the sale of 30-year bonds. In pushing long-term yields sharply downward, this decision provides additional incentive for homeowners to refinance mortgages, for corporations to initiate capital spending projects and for income investors to buy stocks instead of notes and bonds. Another recent plus is the drop in the price of oil and gas, leaving more of the consumer budget for spending on other items.

Additional loss of life, emotional distress and business disruption as a result of terrorism are, of course, possible. A major new assault, though, would not bring America to its knees, but rather strengthen its resolve to root out the terrorists, as well as prompt active roles in the fight by other powerful countries currently providing little more than moral support. The long-term prospects of our economy and stock market remain strong.

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

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