News Should Improve Soon

Look for business conditions to start recovering in the near future and stocks to work their way upward

By Arnie Kaufman

It doesn't take much to spook investors these days. Memories of the long series of failed rallies during the bear market are fresh. Worries about terrorism, the Middle East, Pakistan and India and fall-out from the Enron fiasco are adding to anxieties. Thus, stocks, after a nice bounce off the Sept. 21 low, have been sensitive to any cautionary comments on the economy, earnings or valuations.

We at S&P still believe, however, that jitters will be overcome. Our forecast remains that the market averages will score decent net gains for 2002. Massive monetary and fiscal stimulus, on top of an enormous inventory runoff, will soon get the economy and corporate profits growing again. S&P chief economist David Wyss is forecasting real GDP growth of 2% in the current quarter, after an estimated 1% contraction in last year's final period. He's looking for GDP growth of 2.5% in the second quarter, 3.5% in the third and 4% in the fourth.

Our analysts see a 34% gain in operating profits on the S&P 500 for 2002. That would be from a deeply depressed base and would include sizable benefits from a change in accounting for goodwill. On the other hand, companies may now be trying to sway expectations to the conservative side and analysts' estimates are being tempered by past disappointments. Given the continued low level of inflation, bond yields are unlikely to rise much and the Fed will be in no hurry to push up short-term rates.

Stocks may stay in a trading range for a while. According to S&P technical analyst Mark Arbeter, several months of essentially sideways movement were seen after the initial rebound during major market recoveries in 1999, 1996, 1991 and 1982-83. We feel, nevertheless, that the underlying trend will be upward and that a constructive investment policy will work out well.

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

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