One on One with Phil Dow, Director of Equity Strategy at RBC Dain Rauscher
Monday, November 06, 2006
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SUSIE GHARIB: Joining us now to talk more about today`s market rally, Phil Dow, director of equity strategy at RBC Dain Rauscher. Hi, Phil.
PHIL DOW, DIRECTOR OF EQUITY STRATEGY, RBC DAIN RAUSCHER: Hi, Susie.
GHARIB: What`s your take on what happened in the markets today? Was it all of those big private equity deals or is something else going on?
DOW: I think that had something to do with it, but I think also there`s a suspicion out there from people that avoided the market last week that the Republicans may only lose one House, being the House of Representatives and they`ll keep the Senate. And I think today was kind of pre-election bargain hunting at stocks that trade at pretty reasonable valuations right now Susie.
GHARIB: So talking about the election, how do you think the markets are going to perform after tomorrow`s elections?
DOW: Well, if I`m right, that they just lose the House, then my guess is you`ve got a condition of gridlock where not a whole lot bad can happen, not a whole lot of changes can occur. The market probably might have to take a day or two to digest that. But I think we`ll go on to new highs this year. If they lose both houses, then I think that could be problematic for the market, Susie.
GHARIB: So, problematic in what way?
DOW: I think you can see a decline in the markets if they lose both houses. I think it opens up controversy not only for investigations down the road but for some of the legislation with regard to taxes, possibly anti-globalism (ph) amendments that could hurt the recovery that we have right now, Susie.
GHARIB: Well, let`s go back to your earlier prediction. which is one that we hear. There seems to be some consensus that the Democrats get one House of Congress and the Republicans hold on to the Senate. What stock sectors could be impacted with that kind of a scenario?
DOW: Well in general it`s the defense stocks. It`s the health care stocks that might be hurt a little bit here. It`s just hard to say. And the market response today I felt was really instructive that maybe the markets are going to take it in stride and that the reality is that we`re going to have a condition of gridlock for some time to come, Susie.
GHARIB: So what is your market outlook beyond the elections? What`s your market outlook from now until the end of the year?
DOW: Well, the amazing thing is in the last five years corporate profits have doubled and the valuation of the market has declined from about 30 times trailing earnings to 17 times today. It trades at 15 times forward earnings estimates. So this is not a market valuation where one should expect a big decline. My bet is that it may encourage people to come in as investors to take advantage of high dividend rates and growing dividend rates and reasonable valuations. You could see a lot of money that`s been on the sidelines driving prices higher. So my guess this year, 3 to 5 percent higher on the popular averages like the Dow and the S&P, Susie.
GHARIB: As you know on Friday, the strong employment report made a lot of people feel that it suggested that the Federal Reserve will not be cutting interest rates any time soon, that the economy is not slowing down as much as previously thought. If that is the case, what kind of impact will that have on stock market performance?
DOW: Well I think it`s kind of a sign that the economy is yet stronger than anybody expected. Remember we had big revisions up earlier in the year of 800,000 jobs. Then August and September were raised pretty dramatically, so this has been a recovery with jobs and corporate profits have been great with 13 straight quarters in double digit growth. My guess is what we`ve got, Susie, is an economic condition where the economy may slow next year to under 3 percent kinds of growth rates which has been the historical average, but earnings could be above the historical average of 7 percent and come in at 8 or 9. I think that`s an ideal sweet spot for serious investors.
GHARIB: Speaking of serious investors, how should they structure their portfolios in this environment?
DOW: Right now I don`t know peoples` risk tolerances. But I would think that at least 50 to 60 percent stocks. And I really think that the large cap growth area is quite attractive now. You can buy some of the leading companies in America at current P/Es that are lower than their growth rates for the next couple of years. I think if people can be patient with those, they will be wonderful investments, Susie.
GHARIB: All right. Well, I hope so. Thank you so much, Phil.
DOW: My pleasure, thank you.
GHARIB: We`ve been speaking with Phil Dow, director of equity strategy at RBC Dain Rauscher.
