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Harlan Levy was an attorney at the Federal Communications Commission's Cable Television Bureau before becoming a reporter at WGTR-AM in the Boston area. He then worked as a TV news reporter at WXEX-TV Richmond, VA., WCIX-TV Miami, FL (winning an Emmy), and WVIT-TV, West Hartford, CT. He was... More
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  • Stovall: Dollar to weaken, jobless rate over 10 percent for 2010 and over 9 percent for 2011. 0 comments
    Feb 26, 2010 1:57 AM

    Sam Stovall is Standard & Poor’s’ chief investment strategist, as well as author of the new book The Seven Rules of Wall Street and the column “Stovall's Sector Watch,” a page on
    He is frequently quoted in The New York Times and the Wall Street Journal and often appears on CNBC and other business TV networks.

    H.L.: The global economy now looks shaky with major debt problems for European Union countries. What’s ahead?

    S.S.: A lot of uncertainty, particularly with financial services companies, not only as a result of the recent fed discount rate increase, but also the ongoing bank regulatory hearings in Congress and the sovereign debt concerns in the Mediterranean.
    I would say debt remains the biggest problem for countries, companies, and consumers. The result is slower than expected economic growth and an equity market advance in 2010 that is likely to be substantially below what we saw in 2009.

    H.L.: Do you foresee more volatility ahead in the stock market?

    SS: Volatility is something that has increased over the last couple of years that is likely to stay. From 1950 through 2007 the S&P experienced an average of five days per year in which the market fell by 2 percent or more. In 2008 we approached 50 times, or 10 times the long-term average. I think that’s the result of hedge funds, computerized trading, and inverse Exchange Traded Funds. So going forward I see increased volatility as something that investors will have to get used to.

    H.L.: What do S&P equity analysts currently favor and what’s in the dog house?

    S.S.: Currently we favor health care and industrials and have a positive fundamental outlook for technology, whereas our areas of concern include financials, utilities, and telecom services.

    H.L.:  What’s ahead for the dollar?

    S.S.: The dollar strengthens because the prospect of higher interest rates makes U.S. fixed interest rates more attractive to foreign investors. Possibly in the near term we could see this counter-trend rally in the dollar continuing.
    S&P Economics believes however that the dollar will continue to weaken later in the year because of the expanding debt levels here in the U.S.
    But forecasting currencies is about as easy as guessing where oil prices will be six months form now. Trying to make global investment decisions based on dollar forecasts can be very tricky. Also, as much as 50 percent of the revenues of companies in the S&P 500 come from overseas operations, so higher rates can both help and hurt at the same time.

    H.L.: Initial jobless benefit claims and job losses, continuing unemployment, shrinking consumer spending, and weak consumer confidence are all probems for the economy. What’s your outlook on the economy going forward?

    S.S.: We are likely to see a half-speed recovery. Traditionally we see Gross Domestic Product growth of between 5 and 6 percent in the first year of recovery, but we are only forecasting a 2.7 percent increase in U.S. GDP in 2010. We are not convinced that the U.S. unemployment rate has already peaked, and we believe that unemployment will average above 10 percent for all of 2010, and above 9 percent for all of 2011.
    Therefore, we might find that while the Fed raised the discount rate in February, it might be a very long time before it raises the fed funds rate if unemployment remains stubbornly high and overall economic growth is anemic.

    H.L.: Was the Federal Reserve’s raising the discount rate last week — the rate for the small number of banks that don’t have enough credit to borrow from other banks and have to borrow money from the Fed’s discount window — a quarter of a point to 0.75 percent a big deal or was it basically symbolic?

    SS: I think that the Fed’s raising the discount rate was really more a signal that the patient is no longer in need of life support and that U.S. banks are now able to operate on their own as they were prior to the recent financial crisis.
    In my opinion it doesn’t mean by any stretch that the Fed is seeking to slow economic growth. Rather, it wants to remove the stimulus that is likely no longer needed. That said, the Fed did raise the discount rate sooner than we had expected. We thought it would have first raised the federal funds rate — the rate banks charge for lending to other banks overnight — probably in September and raise the discount rate after. Regardless, we still think the fed funds rate will rise from the current level of between 0 and 0.25 percent up to 0.75 percent by the end of the year.

    H.L.: Should investors be concerned about the raising of the fed funds rate?

    S.S.: Even with the Fed raising the fed funds rate, I do not think investors should panic. I believe the Fed is doing the U.S. economy a favor by draining liquidity from the system and thereby reducing the threat of runaway inflation.

    Disclosure: No positions
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