Interview With S&P Capital IQ Chief Equity Strategist Sam Stovall: Jobless Rate Elevated Through Q1 2013

by: Harlan Levy

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 at

Harlan Levy: How good are the July jobs numbers - 163,000 new jobs, including 172,000 new private jobs and 9,000 government layoffs?

Sam Stovall: Whenever you have a jobs report that takes so many people by surprise, you can be fairly confident that the numbers will then be revised. It makes me wonder why people trade so vigorously on either good or bad government data. One of my favorite cartoons in The New Yorker shows a newscaster reporting that because of revised government data for the fourth quarter of the prior year it has been decided that the Yankees and not the Dodgers won last year’s World Series. So while the numbers are certainly encouraging, they have to be taken with a grain of salt.

That said, I do prefer stronger employment numbers than weaker ones, because, while a weak number would have more likely ensured a stimulative response by the Federal Reserve, a stronger report points to an improving overall economy, which has greater staying power.

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

S.S.: We forecast unemployment, which rose to 8.3 percent in July, to ease slowly, averaging slightly above 8 percent through the first quarter of 2013 before slipping ever so slightly into the 7 percent area, where it should remain until early 2015.

H.L.: What do you think of the earnings reports so far?

S.S.: I’m happy that the full-quarter results are likely to be up 0.4 percent versus the decline of 1 percent that S&P Capital IQ consensus estimates had predicted just before the reporting period began. However, the earnings growth rate has certainly decelerated, and it now appears as though the third quarter results will show a 1.25 percent decline as compared with the 3.25 percent gain expected a month ago. In addition, revenue growth remains anemic at only 2.15 percent, less than half of what was expected for the second quarter as of April 2.

H.L.: Has the housing market hit bottom?

S.S.: We think the housing market has hit bottom, but we don’t think it will recover in a V-shaped fashion. We think it will continue to bounce near these low levels for a while before showing signs of meaningful improvement. Residential construction bottomed in 2011, declining 1.5 percent for that year, and it’s expected to show an 11.3 percent gain in both 2012 and 2013.

H.L.: Is the economy really picking up in spite of the fiscal cliff, Republicans and Democrats in Congress refusing to compromise, and other headwinds?

S.S.: The economy looks as if it is able to maintain a very low altitude, as second quarter Real Gross Domestic Product advanced 1.5 percent on an annualized basis, which we regard as even weaker than a half-speed recovery since World War II. Should Congress continue to be dysfunctional and allow the fiscal cliff to occur, we believe this low-altitude recovery will likely crash into a very sharp recession.

H.L.: What’s ahead for this volatile stock market, which basically doesn’t trend up or down for long?

S.S.: Our The stock market is wrestling with a two-handed scenario. On the one hand history and technicals point to higher prices, whereas on the other hand, economics and earnings growth trends are each pointed lower.

Add to that geopolitical worries emanating from Europe, the Middle East and China, and you can understand why many investors are frozen with indecision. But I find that history can be a great guide - but it’s never gospel - and price action frequently leads to fundamental improvements.

For instance, since 1900 78 percent of all annual lows during presidential election years have occurred in the first half of the year while 85 percent of all annual highs occurred in the second half, and 70 percent of all highs were seen in the final quarter. August had been the best month for the S&P 500 during election years since 1900, and each of the six second-half months have seen average price gains for the S&P 500.

From a technical perspective, our chief technician, Mark Arbeter, pointed out a reversal pattern several weeks ago that indicated we would soon be recovering to the early April highs and likely work our way higher by year-end. However, the headwinds consisting of the European debt crisis, geopolitical tensions in Iran, the prospect of a harder economic landing than anticipated in China, combined with our own soft economic recovery have made this advance a very choppy one.

H.L.: The European debt crisis seems to be a mess in spite of declarations of solidity. What do you see ahead?

S.S.: I see more conviction by the European Central Bank president and European leaders in coming to a meaningful and long-lasting solution, but the required austerity measures and recessionary conditions in Europe will make for a very challenging period ahead. We see 10 of the 17 eurozone nations reporting GDP declines in the third quarter, resulting in a 0.8 percent decline in eurozone Real GDP. Declines will be less in the fourth quarter, and as we head into 2013, yet the eurozone is only expected it recover a GDP advance of 0.4 percent for all of 2013.

Disclosure: I am long AAPL.