“The good news that the economy has added hundreds of thousands of jobs and that corporate profits are rising quickly has done little for the stock market. So just what might ignite a stock rally?” asks Jonathan Fuerbringer in today’s New York Times.

“Some stock analysts say the spark will be evidence that the American economy is not heating up, but cooling down.”

“While it sounds contrarian, a modest cooling off is what Federal Reserve policy makers will be aiming for when they raise their benchmark interest rate, as anticipated, in the months ahead.”

“A cooling down would also curb fears of higher inflation, which has been accelerating this year and could push interest rates higher and unnerve stock investors.”

” ‘The best news we could have is that the economy is beginning to slow down,’ said Stuart Schweitzer, global markets strategist at J. P. Morgan Fleming Asset Management. Though he acknowledges that both job growth and earnings would also be reduced, he said the impact could be offset as interest rates stop rising – or even fall – and as inflation expectations are contained. “

” ‘A moderation in growth, when it comes, will be good news first for bonds and then for stocks,’ he predicted. Stocks could use some good news. After reaching recent peaks on Feb. 11, the Dow Jones industrial average is down 7.5 percent since then and the Standard & Poor’s 500-stock index has dropped 6 percent. The Nasdaq composite index, which reached its recent peak on Jan. 26, has fallen 11.9 percent since then.”

“A slowdown is certain, Mr. Schweitzer says, because rising interest rates and rising inflation are cutting into consumer spending while the impact of President Bush’s tax cuts is fading.”

“High oil and gasoline prices are also crimping consumer and business budgets. And the uncertainty generated by the war in Iraq and the presidential race could also act as a brake on the economy. Still the cooler economy may not show up until the second half of the year, leading to a sustainable stock rally sometime next year.”

“The average forecast of 53 economists is that the gross domestic product, adjusted for inflation, will grow at an annual rate of 4.2 percent in the third quarter and 4 percent in the fourth quarter, down from a 4.9 percent pace in the 12 months ended in March, according to Blue Chip Economic Indicators. On a year over year basis, growth is forecast to slow to a 3.8 percent rate next year, from 4.6 percent this year.”

“The consensus among Wall Street analysts is that earnings will increase 13.5 percent for the companies in the Standard & Poor’s 500 index in the second half of the year, compared with a year earlier. That would be a decline from the 22.7 percent increase forecast for the first half of this year by Thomson Financial.”