Accentuate the Positive
By Joseph Lisanti
Here's what seems to worry investors:
1. The Fed is poised to raise short-term rates. Yields have already risen and are likely to rise more when the Fed acts. That means higher costs for corporate borrowing and home mortgages, which can slow business and consumer spending.
2. Recent revelations about abuse of Iraqi prisoners have outraged the American public and reduced support for the Administration's policies. And the assassination of the Iraqi Governing Council's president adds even greater urgency to the question of who will head the country after June 30.
3. The terrorist attack in Madrid has caused renewed fear of additional violence. Moreover, Iraq seems to have become a rallying point for terrorist groups.
4. Since 1928, the S&P 500 index has had an average price-to-earnings ratio of 15.4 on trailing as-reported earnings. Based on the latest four quarters, investors are currently paying 21.3 times the index's trailing earnings.
5. The U.S. election looks like a toss-up. Although markets may fear the potential of higher taxes under John Kerry, they fear not knowing the outcome even more.
And here's what we see as the other side of the coin:
1. The economy is going strong, and even employment is gaining steam with more than one million U.S. jobs added since September.
2. Corporate profits are robust. We expect 2004 second-quarter operating earnings for the S&P 500 to be up 21.7% over last year.
3. Even though they are heading up, interest rates will likely remain low by historical standards.
4. We are in a favorable place in market cycles: the fourth year of a U.S. president's term and the second year of a bull move.
5. Japan appears to have emerged from its long economic slumber. Recent GDP growth was stronger than expected.
Some negatives, particularly Iraq and terrorism, are wild cards. Nevertheless, we believe the positives outweigh them now.
Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook
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