Sam Stovall is chief equity strategist at S & P Capital IQ as well as the author of The Seven Rules of Wall Street and the column Stovall's Sector Watch, a page on marketscope.com.
Harlan Levy: How do you rate the U.S. economy?
Sam Stovall: Yes. I think the U.S. economy which has been described as in a half-speed recovery mode is now beginning to pick up the pace. The risk of recession which had been 40 to 50 percent is now at 25 percent or less, and now prognosticators are tripping over themselves calling for a bottom in housing or other areas of prolonged anemia.
As a result, the focus remains overseas, but even there investors appear to be a bit more encouraged that a soft landing will occur in China and that the Greek issues will be resolved.
In the U.S. we expect to see real GDP growth of 2.1 percent, up from 1.7 percent growth in 2011. But we probably won't see trend-like growth until 2014. The consumer will likely pick up spending at a similar pace, but it should be supporting and not leading economic growth. We believe that construction, both residential and non-residential, should show mid- to high-single-digit growth this year and more pronounced growth in 2013.
H.L.: Is the big drop in January's jobless claims and the jobless rate heading down to 8 percent sustainable, and are businesses beginning to hire at a pace to match new labor market entrants?
S.S.: I believe that we probably will continue to see a gradual erosion in the unemployment rate, but we believe it will average above 8 percent this year.
Only recently are we beginning to see labor growth that matches the growth in those entering the labor market, so we are now beginning to see growth approximating the number of people entering the workforce. One indicator that I look at is U-6, which is the broadest measure of unemployment, because it includes the headline unemployment rate as well as those who are under-employed and those who have left the workforce because they are disgruntled, and that reading has been coming down along with the headline unemployment rate over the last several months.
H.L.: It appears that the number of homes sold is improving, but do you expect home prices to improve as well?
S.S.: Actually, when the number of homes sold begins to improve, it causes sellers who had kept their properties off the market to put their homes on the market, thus swelling inventories and forcing home sellers to take a little lower price in order to take advantage in turnover activity. As a result S&P Economics believes that the S&P case-Shiller Home Price Index will decline another 4 percent from the current November reading, as the excess supply of unsold homes, particularly distressed properties, continue to weigh on prices.
In December, the National Association of Realtors reported that 32 percent of the 5.36 million existing home sales for 2011 were distressed sales. Because distressed sales typically occur 15 percent below that for comparable homes, the high percentage of distresses sales is depressing the measured prices.
H.L.: Moody's said that in 90 days it may downgrade Morgan Stanley (MS), and Credit Suisse (CS) by up to three notches and Barclays (BCS), Goldman Sachs (GS), JPMorgan Chase (JPM), Citigroup (C), and Deutsche Bank (DB) by two notches. If this happens, how would that affect the banking sector, the economy, and American business in general?
S.S.: I think that because Moody's has already announced that, that much of this possible action is being worked into share prices. We initially saw these particular bank stocks as well as the S&P 500 financial sector in general decline on the news but subsequently recover. So possibly equity investors are regarding this warning as old news or something that should have been done a while ago.
The banking sector is crucial to the improvement in the overall economy. Loan growth has been improving marginally, because banks have been very selective, in an attempt to insure higher-quality loans. In addition, loan demand growth has been fairly modest, as the economic growth projections had remained sub-par. So, as our expectations for U.S. economic growth have been improving, I would expect that loan growth would be on the rise as well. Otherwise the equity market advance might be short-lived. That's because you need a healthy financial sector in order to justify the stock market advance.
H.L.: Do you foresee the same kind of wild volatility ahead in the stock market that we saw last year?
S.S.: I would not see why we would not have it. Last year we saw 21 days in which the S&P 500 hosted one-day declines in excess of 2 percent. This was six more than the average per year since 2000 and more than four times the average than in 1960. Spo far this year, however, volatility has been unnervingly light, indicating that this could be the calm before the storm, because whenever we have seen exceedingly low volatility, it has been usually led to an overall stock market price decline of 5 percent or more. However, there's no guarantee that it will happen this time.
H.L.: Do you expect a stock market correction sometime this year?
S.S.: For me a correction is a decline of 10 to 20o percent Pr chief technician, Mark Arbeter, believes we will, but I can't say that I necessarily agree, since valuations remain attractive by historic standards; interest rates remains at rock-bottom levels, and liquidity remains high. I could see a pullback of 5 to 10 percent to nearly digest the more than 20 percent advance in the S&P 500 since early October, but I have no evidence to point to a rationale behind a more than 10 percent decline.