S&P Sees Upswing Continuing

Selective accumulation remains in order

By Arnie Kaufman

The early stages of recoveries from bear markets vary widely in degree. As time passes, however, deviations from the norm become far less dramatic.

Through last Wednesday, when The Outlook's print edition went to press early because of the holiday, 31% of the bear market loss from March 27, 2000 to September 21, 2001 had been recaptured. That's about average for rebounds in the postwar period. As shown in the table at the bottom right, at the two-month point in the recoveries from the nine former bear markets since World War II, the S&P 500 had won back an average of 33% of the bear market loss.

In each of the nine instances, the gain at the end of six months was greater than that after two months and the gain at the end of 12 months was greater than that after six months. On average, nearly two-thirds of the bear market loss was recovered after six months and almost all of the bear market loss was recouped in a year.

Economic and corporate news will remain bad for a while, but that's typically the case in the early part of a bull market that is associated with an economic recession. Stock prices start recovering well before the headlines improve. The September upturn in stocks would be consistent with the start of an economic expansion in the first quarter of next year.

While price-to-earnings (p-e) ratios currently are high, that won't necessarily keep the bull market from progressing. The preceding economic expansion was the longest in history and gave rise to "new era" optimism. Corporations, especially in information technology, built production and sales capacity to levels far greater than proved justified. Those excesses are now being corrected, painfully. Corporate earnings are in a severe contraction.

Once the economy begins to grow again, however, profits will rebound and p-e ratios will start looking much more reasonable. Low inflation, low interest rates, rapid technological innovation and above-average productivity growth should help support elevated stock valuations.

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