Maintain a Bullish Policy

S&P feels that the upswing that began in early October has further to go

By Arnie Kaufman

The underlying trend appears likely to remain upward. Stock prices are still deeply depressed following the worst bear market in modern history. Prospects for corporate profits in 2003 are improving, with the economy emerging from a soft spot and starting to regain some momentum. While the Fed may be through easing, further fiscal stimulus appears to lie ahead. And December and January usually benefit from healthy reinvestment demand, as bonuses, mutual fund distributions, company contributions to profit-sharing plans, and year-end interest and dividends are put to work.

Despite the recent slowdown, S&P chief economist David Wyss is looking for 3% growth in GDP for 2002 (fourth quarter over fourth quarter). He expects the pace of improvement to be the same or slightly better in 2003.

As of the close Wednesday, Nov. 27, when we went to press early because of the holiday, the S&P 500 was less than 3% below the key 963 level. A move above 963, according to S&P chief technical analyst Mark Arbeter, would complete a bullish double bottom reversal formation and point to further gains.

Nevertheless, market progress in the period ahead is bound to be erratic. Generally, nerves are frayed, given the frequent warnings about additional terrorism, the approach of the deadline for Iraq to declare its weapons of mass destruction and the start of fourth-quarter earnings pre-announcements. Also, some investors who suffered through the bear market have undoubtedly vowed to take advantage of any decent opportunities to reduce their equity exposure. This overhead supply is believed to be particularly heavy just now in a number of big technology issues.

While we continue to recommend that equities account for a sizable 60% of portfolios, new commitments should be made selectively and unhurriedly.

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

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