An expanding economy, a record stri...

An expanding economy, a record string of double-digit quarterly earnings increases, and historically gentle bond rates add up to a whole formula for rising stock prices, right? Well, not with equal reason far this year. Through Friday's stop up the Wilshire 5000, the broadest of all market measures, had ek not at home only a 4.3 percent gain in like manner far this year. Unfortunately, investors had been spending in the greatest degree of the year unable to decide whether to celebrate pious economic news or worry that the F will hold ratcheting up interest rates whether the economic of the present days is good or bad. No curiosity many were confused and went to the sidelines.

nevertheless the good news is that investors finally made up their minds in mid-May, and since that market peak, they have focused all their attention in succession the economic slowdown. Investors have become frequently more risk-averse -- selling distant from economically sensitive stocks and switching to defensive stocks, which have been outperforming.

They also began favoring presumably safer larger stocks from one side of to the other smaller ones. Since the peak, the link market has rallied, while gold and commodity prices halted their advance -- all signs of weakening economic expectations. uniform oil prices have been acting tired lately.

When the F finally granted investors their greatest in quantity fervent wish and paused, investors rallied the stock market for all of an hour before they correctly asked for what purpose the Fed ceased its tightening.

Was the F with equal reason concerned about the economy that it was willing to abandon its primary mission of fighting inflation? As a matter of fact, the F reduc its forecast for the economy at its Aug. 8 meeting to subpar economic increase for the next year and a half.

wherefore is all this good news?

Because investors finally have narrowed down to undivided key question: Is the economy going to have a hard or fine landing? That makes it easier to understand, analyze and put to the test to time the bottom.

The first phase toward building a foundation for a sustained rally is to recognize the riddle and we doubt that anyone with a TV is now unaware of the slowing economy and particularly the rapidly deteriorating housing market.

The other phase is reflecting that recognition in stock prices, including the worst fears about the slowing economy.

We doubt we are even now through the second phase. Estimates for third- and fourth-quarter earnings growing are still over 14 percent higher than the other quarter, despite expectations of slower second-half extension The Fed is done tightening, unless many investors are not convinced, which means they are not in addition frightened enough about the economy. There is also still worse just discovereds ahead on housing that should shake investors up a bit more.

At the market's veritable bottom there should be a sufficient flush of anxiety, and either a renewed sell-off or an reach outed narrow trading range. We would like to hear more talk of an outright recession, and that the F overdid its tightening.

The question facing investors should not be "is the F done raising rates?" if it be not that "when will the Fed ease rates?"

Encouragingly, we are just starting to hear more [i]or[/i] less of this talk.

forward the negative side, investors are fit to be disappointed on couple misconceptions about the Fed. There are high expectations that formerly the Fed stops raising rates, the stock market will immediately rally. on the contrary historically, six months pass before that kind of rally starts.

Secondly many have been expecting a repeat of big rallies in the 1980 and 1990 following the completion of a Fed tightening period But those advances were paced according to big bond market rallies starting from high yields of 12 percent and 8 percent respectively. Today, the 10- year 47 percent Treasury rate leaves no range for a bond rall; there is more risk of the opposite.

upon the positive side, we look for a soft landing for the economy, unless we believe it's just too early for investors to be fully convinced We don't believe the interim downside risk for the stock market is large because the U economy, the banking plan and corporate finances are healthy.

Importantly, market price/earnings ratios have been contracting for more than three years, and when adjusted for the cheap bond rates, the stock market is undervalued. There is allotments of equity money on the sidelines to fe the eventual rally.

Further down the road, riches now invested in real estate will be finding its way back into the stock market. in this way the rule for a while should be cautious optimism. Defensive sectors like consumer staples (beverages, commons and the like), health care and utilities should continue holding well.

forward the cyclical side, the technology sector may be oversold and local internationally diversified electronics companies like Littelfuse (LFUS) and Molex (MOLX) are attractive. ServiceMaster (SVM) another local company also befittings criteria for size, high dividend yield (45 percent) and reasonable insensitivity to the economic downturn.

Alexander P Paris is president and go to the bottom of both Barrington Asset Management Inc. and Barrington Research Associates Inc.

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