Harlan Levy: What do you think of the job situation?
Stuart Freeman: The jobless claims were a little better than expected. Continuing claims were a little bit higher, and, generally, October's private-sector job numbers were the best we've seen in months.
We think job growth will be relatively slow but will continue into next year. Of course, as reconstruction takes place after the hurricane, that will help job growth for the first three to five months of next year, although that should be temporary, but the breadth of job growth will continue to spread out across more industries. That is likely to lead to continuing favorable consumer confidence in 2013 and a modestly lower unemployment rate.
H.L.: What's your outlook for the U.S. economy?
S.F.: With more than 74 percent of the S&P 500 companies reporting at the end of last week, third-quarter earnings were up about 10 percent, although revenues were about flat year-over-year. Only about 30 percent of S&P company revenues were better than expected, whereas 63 percent of company earnings were better than expected, which were all due to margin expansion. The breadth of earnings isn't that great. The number up versus down is 1.7 to 1, which faded from the last two quarters, when they were about 1.9 to 1. So the numbers are softening, and the softness in the international economy is impacting those breadth numbers.
But if we're looking ahead at leading indicators, we think we're at somewhat of a shift point for the economy, and we feel better about the market going forward. Manufacturers' new orders for consumer goods and materials in September as well as orders for non-defense capital goods - excluding aircraft - and building permits, stock prices, the Conference Board's leading consumer credit index, and the interest rate spread between the 10-year Treasury bond and fed funds, those are all leading indicators that are favorable for the next six to nine months. They're telling a positive story for growth.
We also think the global liquidity we see right now is a positive for the economy looking into 2013 as well. And with the Federal Reserve's new quantitative easing program, which is open-ended and ongoing, we're at a point where we moving into a period where the economic backdrop will be better than these third-quarter numbers.
On top of that is the latest consumer confidence number which was a little bit shy of expectations but still higher than the prior period. Consumer confidence continues to look good and beats investors confidence. That's interesting, and the question is which way will the numbers go. The market has a lot of uncertainty ahead - the fiscal cliff and the elections - and that has put somewhat of a lid on stocks and are the reasons investors aren't confident.
Meanwhile, the Chinese purchasing managers' index climbed over 50 in October, which suggests that things will pick up after a seven-month slowdown. It's one number, but perhaps China's slowdown is coming close to subsiding, and we've got potential for Europe to bottom.
All in all, we're expecting 2 percent GDP growth for this year and 2.5 for 2013. We're also looking for higher earnings. Our estimate for S&P 500 operating earnings is $103 this year and $108 next year. We're talking about a 4.9 percent increase, not a strong increase, but should we see Europe flatten out by mid-year, we see potential for upside in that $108 expectation. Our target for the S&P 500 is 1,400 to 1,450 this year, and our preliminary target for next year is 1,525 to 1,575. Again, should we see some flattening in the European economy next year, that target range could be conservative as well.
H.L.: What sectors of the stock market do you like and which ones don't you like?
S.F.: We're really thinking more cyclically now. We're overweight consumer discretionary and technology. We're also overweight the materials segment at this point, and we're overweight telecom services, because we like the modest growth and yield there.
We're generally underweight areas that are little bit more defensive, so we're underweight healthcare, the utility segment, and energy, although we see some potential for pickup in growth in energy demand next year.
H.L.: What do you think the effect on the economy will be under Obama and under Romney?
S.F.: That's the hardest question. It also depends on how the Senate goes.
Given the stated plan from Romney and Ryan, we'll probably see some potential for better growth and perhaps better performance in stocks than in bonds maybe not next year but the year after. They are suggesting reforms that would help small businesses. That's where jobs come from generally. That's one aspect. They also suggest that they're going to be working on energy independence, and if that takes place and we end up with more development of natural resources here, that could grow jobs. More than anything it's a question of helping small businesses with less red tape and a little more opportunity to show profits. Obviously, they also would like to reduce the size of government.
Under Obama, we'll probably see more continued growth - slow growth - which would probably result in less positive prospects for equities than bonds. In both cases you'd still expect over the intermediate term that stocks will outperform bonds, and with interest rates moving slowly higher, that's not a positive for bonds. Someone with long-term fixed income will have less than attractive returns if we see the economy grow over the next year or two.
As to the fiscal cliff, I think under either Obama or Romney we're going to see enough cooperation in Congress - after dealing with brinkmanship, since no one will want to break first - so that adjustments will be made to start to take that problem out further. I don't think either side has an advantage in creating a crisis, so we may get some détente - maybe not full cooperation, but the market is anticipating that's the case. If it doesn't happen, that would be a negative for stocks. But this issue isn't going away any time soon, and gridlock is not what we need.
Disclosure: I am long AAPL.