The Standard & Poor's Investment Policy Committee is composed of 10 senior managers who meet weekly to oversee all investment-related activity done in Standard & Poor's name. Among other things, the IPC advises Standard & Poor's publications and services of the weekly outlook for the markets; sets asset allocation advice for all investors advised by Standard & Poor's and constructs recommended stock and mutual fund portfolios for specific Standard & Poor's publications and products.

Standard & Poor's recommended asset allocation among stock, bond, and cash equivalents is published weekly in several S&P publications including The Outlook. This allocation is determined based on the principle of diversification - that a combination of stock, bond, and cash investments helps balance risk while offering investors ample opportunities to benefit from gains in each asset class. In its weekly review, the IPC considers whether small shifts in the recommended asset allocation are warranted based on current fundamental and technical market factors. These shifts may be defensive - aimed at reducing risk during periods of market turbulence - or opportunistic. Generally, changes in the recommended allocation are made in small increments.

Fundamental factors that the IPC considers may include the corporate earnings outlook, the economic environment, interest rates, tax legislation, and investor sentiment. These factors are important in a "bottom-up" evaluation of stock prices and prospects for future price appreciation. A growing economy, falling interest rates, and strong corporate earnings growth rates are all variables that will likely result in a "bullish" or positive outlook for stock investments.

Technical market analysis is based on a review of current and historical price levels and price changes, trading volume, and other market statistics to identify price points at which investors are likely to buy or sell.

In interpreting fundamental and technical factors, the IPC draws upon the collective experience and expertise of its members, many of whom have more than 20 years' investment experience. Changes in the IPC's recommended asset allocation may result due to temporary market shifts that create a short-term buying or selling opportunity for investors, or to changes in the longer-term market outlook. For example, in October 1997, following a significant decline in stock prices, the Committee raised the stock portion of its asset allocation model by 5% to an allocation of 50% stocks, 30% bonds, and 20% cash equivalents. The Committee noted that recent market declines had made stocks more attractive to investors and resulted in companies being closer to fair value in the market. By the end of 1999, the IPC's recommended allocation to stocks had increased to 65%, due to the strong economy and to the positive corporate earnings outlook.

Below is an example of the Standard & Poor's press release of Standard & Poor's Investment Policy Committee Meeting Notes from May 9, 2001.

May 9, 2001

Fundamental Observations

• Earnings outlooks remain weak and visibility is limited. EPS for the S&P 500 is projected at $54.19 for 2001, down 3% on the year.
• Yet, market action has been encouraging, indicating that investors feel the worst is over.
• Fund flows have been positive, with $4B of the $5B added going to aggressive growth.
• In the four times that the Fed cut rates five times in a row, the S&P 500 advanced an average 12% and 25% in the following six and 12 months. Yet the individual performances were mixed: twice during the first six months the "500" was unchanged.

Technical Observations

• The major averages have traced out bullish short-term bottoming formations, and considering the recent action has been positive, additional near-term gains should be seen. However, there is heavy resistance overhead, which could limit a major upside move for the intermediate-term. At worst, we could see a 33% to 50% retracement of the gains, but do not expect a test of the recent lows.

Long Term Outlook

• Although a genuine recession still seems unlikely, it will probably be next summer before growth gets back above 3% on a sustained basis. The first quarter’s stronger-than- expected GDP growth of 2.0% means that this year’s growth will come in near 2.0%.
• The Fed will cut another 50 basis points, to 4.0%, this month and then to 3.5% by fall.