Market Outlook from S&P

09/08/2007 12:00 am EST

Focus: MARKETS

Mark Arbeter

Chief Technical Strategist, S&P Capital IQ

Mark Arbeter, Chief Technical Strategist,thinks our market today shows a few parallels with 1987, but he’s anticipating a more bullish outcome. The rise and eventual crash of the 1987 three-cycle bull market was a study in excess–both the highs and lows were far more exaggerated than the current market.

The 1982-1987 market soared a whopping 229%, while at our recent peak in July 2007, the market had grown just 94%. The bullish sentiment was also much higher in 1987, with 66% of investors feeling positive. Currently, the American Association of Individual Investors shows just 44% of individual investors are bullish, and newsletter editors are about 50/50-both contrarian signs of a “quite bullish” market. (The recent MoneyShow.com sentiment indicator of active investors indicates much higher levels of bullishness. Tune in to Howard Gold, editor in chief of MoneyShow.com, as he presents the site's most recent poll of investors— Savvy Investors Still Bullish )

For now, Arbeter expects that rate cuts coming down the pike will further extend the bull market run.

Alec Young, International Equity Strategist,addressed global economic concerns, as well as the US’ sub prime issues.

Young sees rising mortgage delinquencies leading to a widening of credit spreads as the cost of capital increases; a drop-off in merger and acquisition activity; a decline in global liquidity as the carry trade unwinds; and continuing volatility in equities–in the US, Europe, and Asian markets.

But the news is not all dim. He noted that while global bond spreads were rising, the cost of borrowing money remains within historical averages. And he sees the weaker-than-expected job numbers and the difficulties in the housing market portending a healthy correction, but not the onset of a bear market.

Young continues to see global opportunities. The world is no longer so reliant on the US and countries across the globe are conducting more business among themselves, exclusive of America.

He still likes the energy segment, particularly the refiners. S&P recently upgraded Exxon (XOM) and also likes Schlumberger (SLB). He expects oil to stay around the low-to-mid $70s.

Young is forecasting increases in the S&P 500 for 2007 and 2008. He believes valuations are still attractive, and suggests that investors diversify their portfolios with international, small- and mid-cap, as well as larger cap stocks. Read Please Stop Worrying About the Fed!

Robert Gold, Senior Director, Equity Research Services and the head of Healthcare Research held investors’ attention with S&P’s top stock selections.

Gold explained the firm’s five-star ranking system, and noted that since 1985, its five-star stocks have returned 16.4%, compared to the S&P 500’s 9.3%.

S&P’s highest ranked stocks are determined by an intrinsic value analysis and must possess superior characteristics, including:

  • Strong and sustainable competitive edge
  • Above average revenues, earnings, free cash flow
  • Strong fundamentals
  • International growth opportunities
  • Upside to 12-month target prices must be higher than peers
  • Compelling valuation, relative to peers
  • Balance of risk and potential reward

Lastly, Young shared S&P’s five-star stocks with attendees: Automatic Data Processing (ADP), Carlisle (CSL), Covance (CVD), CVS Caremark (CVS), EMC (EMC), Jacobs Engineering (JEC), Laboratory Corp. of American (LH), Manitowoc (MTW), McDonald’s (MCD), and Procter & Gamble (PG).

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