Scott Wren: 2010 Will See Modest Gains

Includes: DIA, QQQ, SPY
by: Harlan Levy

Scott L. Wren is a senior equity strategist with Wachovia Securities. Previously he was Senior Equity Strategist with A.G Edwards. He is often quoted in The Chicago Tribune, Los Angeles Times, Washington Post, and Wall Street Journal.

H.L.: How do you analyze the better-than-expected fourth-quarter growth in the economy in Friday’s Gross domestic Product report, and can it be sustained?

S.W.: Our projection for all of 2010 is about 2.5 percent, so I think a lot of the number we saw on Friday was because of inventories. Retailers and others out there have been reducing inventories for a long period of time, so just slowing the pace of inventory reduction adds to GDP.

A lot of Friday’s number was certainly good and a lot better than what we expected, but we’re not going to see that kind of inventory number and such an influence. Consumer spending was up a modest amount, and we would predict that consumer spending will only rise a modest amount in 2010, and probably much of what’s generated in GDP will be due to government spending.

H.L.: The Federal Reserve plans on halting its purchase of mortgage-backed securities in March. What effect will that have?

S.W.: 2010 will be a year when the Fed slowly starts to drain some of the liquidity out of the system. They’re backing off buying so many of these securities, so I think the likely result is that interest rates will likely drift higher but not a lot higher. You need more economic activity to get much higher rates. We could see rates of 4 or 4.25 percent for the 10-year Treasury. It’s just shy of 3.70 right now.

The government is going to be very careful now, because if it steps away from the housing market too quickly, I think there’s going to be a problem, because you have a lot of potential foreclosures this year and into 2011. Housing interest rates need to be kept low just to stabilize that market. If they aren’t, you’ll see another dip in prices. If consumers perceived that the price of their homes would take another drop down, that would dampen consumer spending and consumer sentiment, and it would hurt the stock market.

H.L.: Is the economy in a big stall now with all the uncertainty?

S.W.: I think what we’re going to see is the economy slowing improving, but it’s going to be at a much slower pace than what you would ordinarily see coming out of a recession. But we’re not looking for any double-dip recession. The word we use is “modest:” modest gains in the stock market, modest economic growth, and modest inflation.

H.L.: Some economists predict a stock market sell-off in the second half. You apparently don’t agree.

S.W.: We expect higher volatility in 2010. It would not surprise us to see a 10 or 15 percent pullback, at least once or a couple of times over the course of this year. But we still expect overall net-net that the stock market will gain 5 to 7 percent this year from the 2009 close.

H.L.: Is Obama’s package of tax credits, subsidies, the three-year spending freeze, and other proposals too little to do much to create jobs?

S.W.: Yes. I think that right now small businesses that are the job creator in the U.S. are afraid to hire people, because they don’t know what their tax situation is going to be. They don’t know what health care obligations will be, so you’ll see them hiring temporary workers rather than permanent workers. So there’s a lot of uncertainty out there.

Regarding tax credits, you need to put money in people’s pockets immediately so they’ll spend money. Tax credits don’t work so quickly. The best stimulus is giving citizens a credit card with X-number of thousands of dollars to spend over 60 days without being able to save it. That would give you more bang for your buck than the baloney that’s out there.

The main thing is that creating jobs is not an overnight process, especially coming out of a deep recession like this, and politicians are typically not prone to give it the time it takes. They want it now. Most of their measures are desperate attempts by politicians to keep their jobs in the 2010 election cycle.

H.L.: What’s your analysis of the volatility in the stock market?

S.W.: You had the initial euphoria off the GDP number, and then the realization that it was largely from inventories. We’ve clearly had a big run off the bottom, and there’s a lot of good news priced into the market. We’ve seen a lot of good earnings news, but we haven’t had a market pause or time-out in quite a while, so it wouldn’t be a surprise to have a sideways or slightly down market for a little while.

H.L.: Are stocks oversold or overbought, and are we at a top?

S.W.: I think we’re pretty close to fair value right now, not oversold or overbought.

H.L.: What sectors of the stock market do you like?

S.W.: We particularly like the industrial and material sectors. We like industry groups like air freight and logistics, construction and farm machinery, and industrial conglomerates. In materials we like aluminum, steel, and paper products.

H.L.: What’s happening in China as it tries to stave off a real estate bubble has shaken global stock markets. Is the reaction overblown?

S.W.: I think there’s a lot of excess capacity there, but I don’t think it’s going to be a crash-and-burn scenario. Down the road I think it’s a high possibility that they have a pretty good property-value correction, both residential and commercial. There will likely be some losses here for investors in China. There has been a lot of U.S. investment in China probably at inflated prices, but I don’t think it will have a large effect on the U.S. market, just because the middle class growth in China will swamp any losses from a property bubble.

Disclosure: No positions