Interview With Sam Stovall: After S&P 500 Rises 100 Points, Double-Digit Decline Possible

Includes: SPY
by: Harlan Levy

Sam Stovall is S & P Capital IQ chief investment strategist with S&P Capital IQ and the author of The Seven Rules of Wall Street. His column Stovall's Sector Watch is on a page on

Harlan Levy: Is the U.S. economy stalling in the wake of the disappointing report of only 115,000 new jobs in April?

Sam Stovall: I think that the weaker than expected April jobs report is confirming that this economic recovery can be described as half-speed at best. Since World War II, in the third and fourth years of economic recovery, which we are in and will soon be in, growth has approximated 4 percent on a year-over-year basis. We project real Gross Domestic Product growth to have risen 2.2 percent from June 2011 through June 2012, and only 2.3 percent from June 2012 through June 2013.

We don't think we're on a precipice of a new recession. However, we also don't believe that economic growth is likely to accelerate any time soon.

H.L.: What's ahead for jobs and jobless claims?

S.S.: All I can say is that our belief is that the unemployment rate will likely average a shade above 8 percent this year and a shade below 8 percent next year. Unfortunately unemployment remains stubbornly high this far into an economic expansion. Until we see an improvement in housing, small job growth, and just the willingness of major corporations to increase their hiring, the unemployment rate will take its time to come down.

H.L.: What do you make of the latest retail sales, productivity, manufacturing, and non-manufacturing reports?

S.S.: Any time that a report is worse than expected it's not a good thing, especially when the economy is having such a hard time gaining and maintaining traction. At the beginning of last week, investors were encouraged by a stronger than expected ISM manufacturing report. Yet, like a celebrity being surrounded by autograph seekers, this positive data point was surrounded by a sea of disappointment, from factory orders to productivity to retail sales, and the ISM non-manufacturing report.

Next week there are not a lot of economic data points to come out to help us feel any more encouraged, not because the data is expected to be bad, but there really aren't many economic reports of consequence to be released. So I think investors will have to stew in their own vat of concerns as they relate to last week's less than uplifting reports.

H.L.: Some analysts see the housing market as already having hit bottom and beginning to recover. Do you agree?

S.S.: Yes. Our projection is that the retail construction sector of the economy recorded its final annual decline in 2011. We anticipate it will grow 9.8 percent in 2012. That's not to mean that we believe housing is back to the races, but rather that it is beginning to recover from a very low level. We still believe that housing has a long way to go in working off existing inventory as well as the backlog of unresolved foreclosures.

H.L.: Has the stock market had its big run-up already, or is it just going through a volatile spasm before pausing?

S.S.: Our belief is that we're going through a choppy, unnerving consolidation phase that will likely resolve itself to the upside as the S&P 500 approaches 1,475 or 100 points higher than where we are today. Our chief technician believes that will complete the fifth wave of a five-wave up cycle before we become vulnerable to a double-digit decline similar to what we experienced in the last two summers. If you're a comic book enthusiast, now would be the time that The Human Torch of The Fantastic Four to say, "Flame off."

H.L.: The European debt crisis does not appear to be on the way to a solution with the growing rift over austerity. What's ahead?

S.S.: That's the big unknown. It seemed as if the International Monetary Fund, the European Central Bank, as well as the sovereign country leaders had agreed on an austerity plan that, even with total acceptance and adherence, was problematic. Yet with leadership change that leads more to the left, combined with austerity fatigue being exhibited by the electorate at large, one has to question whether Europe's attempt at resolving its issues will be successful. In other words, the problems haven't gone away and probably will get worse before they get better.

The main problem is that a lot of the world's economies are so intertwined. About 15 percent of U.S. exports go to Europe, whereas Europe is China's biggest trade partner. Currently, the Eurozone is expected to see its weakest GDP performance in the third quarter, with an annualized decline of 0.7 percent. For the full year, eight of the 17 nations are expected to post year-over-year declines in real GDP. As a result, the uncertainty surrounding the depth of this recession has been adding to investor concerns and will likely do so until we start to see European economic reports that hint at an eventual recovery.

Right now our expectation is that this recession will last into the third quarter and likely drag the Eurozone down by half a percent for the full year. Either there's a recovery or Europe goes out of business, and our belief is that there will be a recovery, albeit a slow one, that will start in either the third or fourth quarter.

Disclosure: I am long AAPL.