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Get Four
|  | JULY 23, 2004
 THE OUTLOOK By Joseph Lisanti Reduce Stock Holdings Slower earnings growth and the inability of stocks to rise on good news have caused S&P to reduce its U.S. equity allocation to 45% The world's preeminent central banker offered reassurance that U.S. economic growth will continue. And the world's largest software company decided to put $32 billion into its shareholders' pockets at the start of the 2004 holiday shopping season. Despite the good news, stocks declined. To us, that's not a great omen for the market in the weeks ahead. For some time, stocks have been locked in a trading range. They remain perilously close to the bottom of that range. If favorable front-page news doesn't cause stocks to rally, what will? We see other reasons for caution, too. The earnings report season has been decidedly mixed so far. Technology companies have been talking down expectations for the remainder of the year, and many retailers are saying that sales are softer than expected. Although year-over-year quarterly earnings continue to show growth, the gains in future quarters are likely to be smaller. That may trouble some investors. Aside from earnings questions, we see large pharmaceutical company stocks coming under increased pressure as investors worry that a Kerry victory in November could mean some price restraints on prescription drugs. As a result, we have lowered our sector recommendation on health care stocks to a market weighting. Meanwhile, energy prices remain stubbornly high, in part because of a "terrorism premium" that has been tacked on to crude oil prices. We don't see that ending anytime soon. Consequently, we now recommend an above-market weighting only in the energy sector. On balance, the market looks more unstable to us than it did a few weeks ago. We advise moving 5% of assets from domestic stocks to cash. We now suggest 35% of your portfolio be in cash and equivalents. Cautious investors may want to increase the portion of their stock holdings in dividend payers. For 2004, through July 16, stocks in the S&P 500 that pay dividends gained 4.2%, while non-payers lost 5%.  Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
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