Navigating the Rough Seas with S&P

02/08/2008 12:00 am EST

Focus: MARKETS

Sam Stovall

Chief Investment Strategist, CFRA Research

Closing the World Money Show in Orlando, a panel of experts from Standard & Poor's shared their market and economic outlook, as well as their favorite stocks…

Sam Stovall, S&P’s chief investment strategist, acknowledged investors’ worries about the possibility of a recession, and noted that every significant downturn for the last 40 years been accompanied by a decline in residential construction. He believes the chances are good that we are already in a recession. However, he’s less concerned with that than he is with the market’s response to such a downturn.

But the good news, he says, is that this slowdown will most likely emulate that of 1990-1991, which was short-lived and shallow.
 
Stovall remains fairly optimistic about earnings and sees a sharp recovery in consumer discretionary and technology spending, after the Federal Reserve’s rate cuts have had time to filter through the economy.

He cautioned investors not to fight the Fed, to expect additional market declines of about 20% for the next few months, and to just sit tight for another six months or so, when the time will most likely be right to begin buying. Stovall is targeting a 1516 level on the S&P 500 by year-end.

Currently, his team favors consumer staples, healthcare, and utilities, but he expects the cyclical sectors to underperform in the near term. S&P is slightly underweighted in equities and bonds and overweighted in cash at the moment.

Mark Arbeter, chief technical strategist, told the audience that he is watching moving averages to determine whether we are in a correction or a bear market.

But he noted that when the market hit the panic low at the end of January, it was accompanied by very heavy volume, a potentially good sign. Arbeter believes the low will be retested and if the market holds at that level, the institutions will begin to come back in, pushing stocks higher.

He also shared recent sentiment data, remarking that advisors are currently 8% more bullish than bearish, 40% vs. 32%.

Alexander Young, equity market strategist, told attendees that the current housing and debt problems in the US, accompanied by high oil prices, are causing our domestic slowdown to seep into other international economies. S&P anticipated this late last year and reduced its international allocations in both developed and emerging markets.

Young sees an increase in profit-taking in emerging markets as investors worry about rising valuations and are uncertain of continued high rates of earnings growth. He noted that developed overseas markets are flat with emerging markets that are experiencing growth rates from the mid- to high-teens. Young believes that investors are going to want to see some trough in earnings before they start to pick stocks up again.

As for the US, Young believes the economy is bottoming out and that we may see price-earnings ratios expand this summer, bringing some confidence back to investors.

The dollar has been beaten up and is flattening out. But the Fed’s rate cuts are making it less attractive, leading global investors to shift more of their funds into Euros and pounds. However, as global growth rates weaken, the dollar may begin to look better to investors.
 
Steve Biggar, global director of equity research, mentioned the top ten stocks in S&P’s portfolio. They are all strong buys, based on S&P’s one-to-five-star ranking system. (S&P’s analysts begin with a top-down forecast, then do an intrinsic value and relative-valuation analysis, to pick the stocks with the most investment potential:

Coca Cola (Nyse:KO)
Covance (Nyse: CVD)
CVS Caremark (Nyse: CVS)
Ebay (Nasdaq: EBAY)
Hologic (Nasdaq: HOLX)
Lab Corp of America (Nyse: LH)
Manitowoc (Nyse: MTW)
McDonalds (Nyse: MCD)
Microsoft (Nasdaq: MSFT)
Procter & Gamble (Nyse: PG)

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