As of the Sept. 21 bear market low, the S&P 500 had fallen for 18 months and was off 37% from its high (the second largest postwar decline). Nasdaq was down 72% from its high, the worst drop in its 30-year history, and had given back 99.9% of the bull market gain from October 1998 to March 2000.
An easy monetary policy begins to work about a year after it goes into effect. While terrorism is adding to weakness in the economy, the Fed will probably succeed in countering that pressure through more aggressive rate cutting than would otherwise have been the case. And it will get help from a fiscal stimulus package now working its way through Congress.
Assuming no further large-scale terrorist acts, GDP should turn upward in the first quarter of 2002 and continue to improve throughout next year. Corporate profit estimates for 2001 are still being adjusted downward, but earnings should rebound nicely next year even though companies will continue to have trouble raising prices and will incur rising security costs.
At turning points in the economy, both upward and downward, corporate profits often swing widely. In the two calendar years following the recessions of 1990-91, 1981-82, 1973-75, 1969-70 and 1960-61, the average earnings gain on the S&P 500 ranged from 12% to 17% annually.
The recent rally has been accompanied by considerable skepticism, which we would view as a positive because it suggests that additional potential buying power exists. We continue to recommend a policy of accumulation. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook