Stovall: The Worst Is Over

05/01/2008 12:00 am EST


Sam Stovall

Chief Investment Strategist, CFRA Research

Sam Stovall, Standard & Poor's chief equity strategist and's 2007 Guru of the Year, says that stocks have in all likelihood hit bottom.

Standard & Poor's Investment Policy Committee believes that, from several perspectives, the worst of the recent equity price decline is likely over.

S&P's Economics sees a decline in first-half, real gross domestic product (GDP) and forecasts that the National Bureau of Economic Research will eventually rule that the United States was in a recession from December 2007 through July 2008.

However, David Wyss, S&P's chief economist, believes the US economy will begin to benefit from the spending of tax-rebate checks late in the second quarter. An analysis of the 2001 tax rebate indicates households spent about 60% of the rebate within 90 days.

The US Federal Reserve has also done its part to keep this economy from sliding into a deep recession. Since September 2007, the Federal Open Market Committee (FOMC) has cut short-term interest rates by three percentage points to 2.25%. (The FOMC cut the federal funds rate by another quarter-point Wednesday-Editor.)

S&P equity analysts project that S&P 500 earnings will improve by 11.8% for the year, led by strength in consumer discretionary, information technology, and telecommunications companies. Only the financials, industrials, and materials sectors are likely to post growth below 10%. While the final 2008 earnings advance may turn out to be more modest than expected, we think easier comparisons with last year's decline, tax-rebate spending, and Fed rate cuts, among other factors, will drive solid, year-over-year growth.

The correction of 2007-2008 appears similar to the mini-bear market of 1990. The magnitude and duration of this correction has also kept pace with historical averages.

In 1990, the S&P 500 fell 19.9% in three months, and successfully retested this low within three more months. This time, the S&P 500 declined 18.6% in three months and has successfully retested its low during the past two months.

Historically, the S&P 500 has bottomed 60% through an average recession since 1945. Similar timing-if we are correct with our estimate of a December 2007 to July 2008 recession-would point to a February/March bottom.

And finally, the 16 corrections (declines of 10% to 20%) in the S&P 500 since 1945 have taken an average of five months to be completed, which again points to a March bottom this time around. Yet, surprisingly, it's taken only four months to recover all that was lost during these prior corrections. Should history repeat itself (and there's no guarantee it will), this would indicate the S&P 500 could retake its old high of 1565 by July.

S&P's Investment Policy Committee is maintaining its year-end 2008 target of 1560. The Equity Strategy Group has raised the recommended exposure to cyclical sectors and reduced the suggested allocations to defensive ones.

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