Friday July 13, 2001 (4:53 pm ET)
Poised for Recovery
S&P continues to expect stocks to be substantially higher by year-end
The market doesn't need a lot of good news at this stage, just relief from
the pervasive gloom and doom of recent months. A jump-start could
come from the covering of positions by the large contingent of traders
who have been selling short and otherwise betting against stocks, while
longer-term investors seem to be waiting for any reasonable excuse to
put some of their expanded cash reserves to work.
Behind this restlessness is historical evidence that monetary ease leads
in time to economic improvement, and that in between, stocks start to
rise.
It was only January when the Fed began pushing down rates. S&P chief
economist David Wyss says it takes nine months to a year for the easing
to really bear fruit, and that housing, traditionally the first sector to be
helped, has already seen benefits.
Wyss points out that when the economy was growing too rapidly in 1999
and the early part of 2000, doubts spread about whether the Fed could
rein things in. Yet, a year after a tightening policy was instituted, a
slowdown was evident.
This time around, moreover, Fed easing, which probably isn't yet over,
will be augmented by tax rebates and cuts. Also, energy prices, while
difficult to predict, have been coming down lately, which will give
consumer purchasing power and business profit margins at least a
temporary boost.
Stocks' p-e ratios are above average. But that's typically the case at
earnings troughs and when the underlying pace of productivity growth is
elevated.
High potential liquidity is another reason valuations should remain above
the historical norm. The large numbers of baby boomers, now in their
peak earning years, are building up sizable balances in their 401(k)
plans. Though currently allocating those funds somewhat more
cautiously, they continue to see stocks as the way to achieve a secure
retirement.
We at S&P believe a policy of selective accumulation is justified.
13-Jul-2001 16:53:25 (4297227) Copyright 2000 Standard & Poor's
Investment Advisory Services LLC. The information contained in this
report may not be published, broadcast, rewritten or otherwise
distributed without prior written consent from Standard & Poor's. |
