Selective Buying Advised

The market trend S&P sees will be jagged, but basically upward

By Arnie Kaufman

No one seems to be in a hurry to put money to work in the market. Stocks are hardly screaming buys. Despite the deep bear market of 2000-2001, p-e ratios are relatively high. But a recovery from the recession should soon take root and help justify today's valuations. While the averages may stay in a trading range in the near term, we expect gradual improvement in the economy and in investor psychology to lead to modest stock gains for the year.

The news lately has been more upbeat. So far, most fourth-quarter 2001 profit reports are matching or slightly exceeding recently lowered expectations, and companies generally are a touch more optimistic regarding the future. After a long and steep decline, our analysts' earnings estimates have been flattening out.

Hopes for additional fiscal stimulus were revived last week. While we don't believe a package out of Congress is necessary to get the economy growing again, it would serve as insurance against any disappointments, such as a possible business letdown once the impact on manufacturers of the re-stocking of inventories starts to wane.

Profit margin pressures are a concern. Pricing power of U.S. corporations remains weak, owing to excess capacity and tough competition (partly because of the strong dollar, a major advantage for foreign producers). Security spending, insurance premiums and labor costs are up.

At the same time, though, controlling expenses is an even greater priority than in the past. With continuing technological advances, productivity should remain high. And it would seem that, through heavy write-offs, the decks are being well cleared for improved corporate performance.

Investors generally are holding considerable cash reserves, so it won't take too much in the way of improved confidence for stocks to extend their post-September 21 gains. A policy of selective accumulation remains in order.

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

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