Liquidity, meanwhile, is exceptionally high and alternatives to stocks remain unappealing. Money market rates, already paltry, would fall further on any additional cut in the fed funds target.
Price-to-earnings ratios are usually lower at the start of a new bull market than they are now, leading many to assume that stock gains will be relatively hard to come by. Still, it's puzzling that many strategists who at the outset of 2002 were looking for mid-single-digit annual rates of gain for several years ahead have not bumped up those forecasts in the light of the 22% drop in the S&P 500 in the past 10 months, especially since trailing four-quarter actual earnings and forward four-quarter estimated earnings have risen, bond yields have fallen and inflation has remained subdued.
To be sure, the risk of war with Iraq has increased in the interim. But by the same token, at the beginning of this year, not too long after September 11, terrorism was somewhat higher on the anxiety scale.
There's still a chance that investors will receive assistance from Washington in 2003, such as elimination of double taxation of dividends and an increase in the maximum annual deduction for net capital losses. Stocks may also have the calendar in their favor. The period from November through January has provided an average cumulative return (excluding dividends) of 3.8% on the S&P 500 since 1928, the best consecutive three months of the year for the index. The coming year, moreover, will be the third of the four-year presidential term. The "500" has gained an average of 14% in the third year of the election cycle since 1928, vs. 3% in the first year, 5% in the second and 7% in the fourth.
We continue to recommend a positive investment policy. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook