Stocks: A Rising Wall of Worry

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From Standard & Poor's Equity Research

As a result, said Kessler, they are racing to reduce their overexposure to the sector -- possibly selling their 2007 winners in an effort to ensure that paper profits don't disappear.

"I think tech investors should take a deep breath, and realize that this pull-back will probably provide us with longer-term investment opportunities as PC demand remains healthy, interest in Internet video capabilities is high, and corporate and consumer needs for storage have never been stronger," he said.

The International Glass Also Looks Half Empty

Both developed European and Asian equities, as well as emerging markets (EM) are currently experiencing heightened volatility. The S&P Europe 350 Index and the Japanese S&P Topix 150 Index are down 3.3% and 6.3% in this month, respectively. In addition, the MSCI EM Index has fallen 6% from its highs in late October.

S&P Equity Strategy believes weakening U.S. economic visibility is primarily to blame as increasing fears of a widening consumer retrenchment take hold amid ongoing housing market weakness, widening credit related writedowns at the world's leading financial institutions, and record oil prices.

In addition, while EM economic momentum continues unabated, the European and Japanese economies are slowing, increasing their reliance on the U.S. for growth. As a result, we believe investors are selling stocks in anticipation of slowing profit growth.

While the fundamental outlook is murky, we believe much of investors worst fears have already been discounted in international equity valuations, and that the current pullback will not mark the end of the current international equity bull market. S&P Economics believes the U.S. will avoid recession as record exports continue to offset a lackluster housing market and high oil prices. In addition, we expect soft landings in Europe, the U.K. and Japan in 2008, while EM GDP growth is likely to remain robust.

Lastly, continued U.S. dollar weakness vs. a wide array of foreign currencies will likely continue to boost U.S. investor returns in international equities, especially in developed overseas markets.

As a result, S&P's Investment Policy Committee continues to recommend an underweighting of U.S. equities (40% vs. the benchmark 45% recommended exposure) and an overweighting for international equities (20% vs. the benchmark 15%), while maintaining an underweighting for bonds (25% now vs. the benchmark 30%) and cash holdings of 15%, vs. the more normal 10%.

Stovall is chief investment strategist for Standard & Poor's Equity Research Services . Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's . Young is an equity strategist for Standard & Poor's .