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The Picture Is Improving

Many of the problems that have beleaguered stocks remain, but there are some bright signs on the horizon, says S&P's The Outlook

By Joseph Lisanti

With the economy still growing and favorable seasonal factors likely to help stocks, we at S&P think it's time to increase equity exposure.

We have increased our yearend S&P 500 target to 1150 from 1130. Our new projection would represent about a 3.5% gain for 2004. In addition, we have revised our midyear 2005 target for the "500" to 1205 from 1190, and have established a 1215 target for yearend 2005.

Many of the problems that have beleaguered stocks remain, but there are some bright signs on the horizon. Soon the U.S. presidential election will be decided, ending a prolonged period of uncertainty.

What's more, the economy and consumers appear to have adjusted to higher oil prices. David Wyss, Standard & Poor's chief economist, notes that the increase in gasoline prices is just slightly above the general rise in consumer prices over the past four decades.

Interest rates are rising, but remain low enough to accommodate both the housing market and corporate borrowing needs. And though corporate earnings growth is decelerating, we are likely to see another all-time high in 2005.

With the market now in its seasonally strongest quarter, we think it is an opportune time to move 5% of assets from cash to domestic stocks. We advise moving another 5% to foreign stocks. Many overseas markets trade at a lower p-e multiple than ours, and we expect a decline in the dollar to improve returns for assets denominated in other currencies.

We would move another 15% to bonds with maturities between one and five years. With interest rates rising, longer bonds have greater risk with little possibility of reward.

Our cash position is now 15%. Back in February, we attempted to stretch the definition of cash to include short-term notes of up to two years. At the time, they were yielding slightly more than money funds. Our move tended to confuse, rather than clarify. While we still believe that your bond investments should be mostly short term, we have moved them back to their traditional asset class and now define cash as money market holdings.

Lisanti is editor of Standard & Poor's weekly investing newsletter,

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