Patience Will Be Rewarded

Though the market may move narrowly in the near term, gains are likely down the road

By Arnie Kaufman

As recoveries from bear markets go, the current upswing has been unimpressive. In the seven months since the Sept. 21 low, the S&P 500 is up just 16%. The average gain at the seven-month mark for the nine preceding postwar recoveries that reached new highs was 29%.

We don't expect the market to move up very much in the near term, nor do we see the downside risk as large. So far, first-quarter profit reports have been eliciting a mixed response. GDP is coming out of the recession at a gallop, but earnings are lagging because export markets remain soft and companies are finding it difficult to raise prices in a low-inflation, highly competitive business environment.

Moreover, downtrends are still being experienced by some major sectors, such as those dependent on information technology investment. This creates a significant drag on earnings of market-cap-weighted indexes such as the "500."

Analysts are predicting strong year-to-year gains in overall profits for the remainder of 2002, but investors are skeptical. Earnings estimates for 2002 are still being lowered, even if the rate of decline is moderating.

Also, concern about the integrity of corporate reporting makes it difficult for investors to look at what seems to be good earnings news and then draw the conclusion that the stock is a good buy.

The S&P 500, which ended last week around 1125, may hold in the range of 1080 to 1180, according to S&P chief technical analyst Mark Arbeter. Support has been making itself felt above February's twin lows around 1080, while 1180, says Arbeter, has been a brick wall, with four rallies failing to penetrate it.

The expansion of the economy, however, should carry through to corporate earnings and stock prices before too long. We advise keeping equities at 60% of portfolios.

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

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