The bigger question may be how will the market overcome the negative psychology resulting from the risk of additional terrorism, the low esteem in which corporate America and Wall Street are now held, and the repeated failed rallies so far this year.
At this stage of the cycle, investors should be bidding up stocks on the prospect of a multi-year business upswing. They're not doing that. The recession probably ended in January, and the S&P 500 is down since then. Four months into every other economic expansion of the past 100 years, the stock market showed a gain, with a solid 15% rise on average.
What will turn things around? One possibility is a capitulation, or indiscriminate dumping of holdings, that clears stock out of weak hands. Few signs that we are building toward such a climax have been evident, however.
Surprisingly good earnings might do the trick. But while year-to-year improvement in profits is pretty much assured for the balance of 2002 because of the dismal results in the second, third and fourth quarters of last year, there's no reason to believe that earnings will exceed current expectations. Our analysts' estimates of 2002 profits have leveled off after a long and steep decline, but have yet to rise.
We feel that improving fundamentals will win out in time. In the absence of any likely near-term upside catalysts, however, we would move slowly for now. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook