And with higher prices, many stocks that individuals might have earmarked for yearend tax-loss selling may stay put. The same goes for the hedge funds. In early October, hedge-fund watchers feared that a wave of redemptions in December would put downward pressure on the market. But with the recent upturn, many investors who had planned to cash out may well leave their money on the table. Democratic victories in the Nov. 3 elections should also benefit stocks.
Higher productivity is critical in keeping inflation in check.
Equity investors could get tripped up in the short run. For starters, a chunk of the market's October-November gains could be wiped out if the Federal Reserve fails to follow up its September and October rate cuts when the board meets on Nov. 17. Legg Mason Fund Adviser Inc. Such a move would not only rile the U.S. equity market but might also upset the fragile emerging markets, some of which are finally starting to climb out of their financial morass. Big-caps, in particular, may be constrained by valuation problems. A better earnings outlook could fix that.