Scott L. Wren is a Senior Equity Strategist with Wells Fargo Advisors. Previously, he was Senior Equity Strategist with A.G Edwards.
Harlan Levy: What do September's data -- a 7.8 percent unemployment rate, the lowest in nearly four years, and only 114,000 new jobs in September -- say about the economy?
Scott Wren: The economy is going to continue to move ahead at a modest pace. I think non-farm payroll growth, if you look at demographics, needs to be at least 125,000 a month just to absorb the new entrants into the labor force. So when the economy is growing as slowly as it's growing right now, it's tough to make a big dent in the labor market. Companies are just not hiring people in large numbers. A very broad array of industries are hiring, but just not a lot of people. The unemployment rate falling from 8.1 percent to 7.8 shows that the economy is moving ahead and employment is moving ahead slowly, and I think that's going to be the situation through 2013.
H.L.: What's your prediction for the U.S. economy for the rest of this year and 2013 after the election?
S.W.: Our projection is for 2 percent growth this year. That might be a little high, and I think it'll be close to 2.5 percent in 2013. That's below trend still, but modestly better than what we will see this year.
H.L.: Is the U.S. housing market near a rebound?
S.W.: It's stabilizing. I think that low interest rates have helped. But there's a shadow inventory out there -- properties the banks hold on their books, and properties that they have chosen not to foreclose on yet, but will do so. And there are a lot of people way behind on their mortgage payments, and people who are underwater on their houses. So I think housing will probably contribute very modestly to economic growth this year and next year. I think we're past the worst, but we're a long way from what I would term a rebound.
H.L.: Where is the stock market headed?
S.W.: Our year-end target range for the S&P 500 has been 1,400 to 1,450. We're a little bit above that now, but we still feel comfortable with our target. We think between now and the end of this year, the market will experience some downside; and then next year, you're probably going to see a 5 to 8 percent increase in the S&P 500, modest gains next year. We'll still be in this modest-growth, modest-inflation kind of environment, and stocks can do OK in that kind of environment. They're not richly valued, and you'll see some modest earnings gains -- maybe close to 5 percent next year. There's not a lot to get excited about. I also think that the actions of the Federal Reserve and other central banks around the world have helped push equity prices higher here, but I don't think you'll see a big improvement in economic growth and employment because of the Fed's recently announced QE3 bond-buying program. We're in this environment at least through 2013, and probably longer than that.
H.L.: What kinds of stocks do you like, and what don't you like?
S.W.: Ideally, we want to be in stocks that are still sensitive to the economic cycle. We continue to like the consumer discretionary cycle, technology, materials, and we also have been overweight in telecom services. That's more defensive, but it has good dividends, and it's undervalued. It may be getting a little stretched here, but we're still overweight that sector. The things we don't like are more defensive, and are therefore less sensitive to the economy. We're underweight healthcare, utilities, which did great last year, but not this year. Financials have performed better, but we're a little underweight financials, and we're not expecting much out of them.
H.L.: What do you think will happen as we approach the trillion-dollar, year-end "fiscal cliff" and expiration of the Bush tax cuts?
S.W.: I don't think we're going to roll over the fiscal cliff, but clearly, we're not going to do anything before the elections. I think the lame-duck Congress won't be able to do anything, either. What I think will happen is that the new Congress will be sworn in in January, and then they'll get to work on extending the tax cuts and not doing the spending cuts, and making that retroactive to January 1. We'll see some volatility around that, but in the end, after January 1 is when the can will be kicked down the road for say, 12 months. We'll probably see those kinds of decisions kicked down the road in increments for several years. It will probably take some crisis before some actual tough decisions are made.
In the meantime, the market is OK with kicking those things down the road, but the market will at least want some tough decision to be made. We'll probably want to see some plan to deal with the deficit. I don't think the president has a plan for the deficit. The Romney-Ryan team does, but theirs doesn't address the deficit for multiple decades. Ryan's plan is not aggressive enough, in my opinion. I don't know what Obama's plan is. Based on their projections for deficits when you go out to 2020, I'm assuming there is no plan.
I think the market will want some sort of plan in 2013, whoever is president. Congress and the president will have to make some compromise to come up with some sort of plan. If they don't, the market will start to be unhappy about that. Maybe not right away, but it will create headwinds.
Although I don't think interest rates will start to move up in the bond market in the next few years, the credit markets will start to worry about the inability of the U.S. Congress to address this long-term issue. In the past, the saying was that gridlock is good, but starting with the next Congress, the markets may not think so.
We can address a lot of these issues and make some progress on them if we start doing it now. If we wait until there's a bond market crisis because people won't want to lend us money, then we're Europe. You need to get on this now. The financial markets will like it. It's what needs to happen, and it's certainly going to be some combination of spending cuts and tax increases. Anybody -- and I don't care what income level you're on -- if you think your taxes aren't going to go up, you're being naïve. We're all going to be paying higher taxes.