One on One with Sam Stovall, Chief Investment Strategist at Standard & Poor's.
Tuesday, August 14, 2007
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SUSIE GHARIB: For more analysis of today's market sell-off, we're joined now by Sam Stovall, chief investment strategist at Standard & Poor's. Hi, Sam.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hi, Susie.
GHARIB: You know, Sam, everyday there seems to be some new thing that throws everybody off balance and surprises investors. What is your assessment of what's going on in this market sell off?
STOVALL: Well, I think as you described and as Paul was mentioning before, we seem to get additional bits of news that causes investors to scratch their heads and to say well, what do we really not know about all of this? What new things are we going to discover about the consumers and possibly the consumers losing their interest in spending the way they have over the past several years? What are we going to do about this national real estate decline? What do we do about the crisis in liquidity?" and if the professionals are being caught up in this, what am I, the typical retail investor, likely to do?
GHARIB: Is this to you a normal financial downturn or is it somewhat different? You've had so many years of experience of living through these financial cycles before.
STOVALL: Well, it's an 8 percent decline from the July 19th high for the S&P 500 to where we close today. So you would actually only call this a pullback. We would have to go beyond 10 percent to call it a correction and every bull market since 1970 has seen at least one 10 percent plus pullback in it. We have just not had it yet. But I think one reason why investors are so concerned about this one is you have to go back to 2002 during the tail end of the most recent market meltdown to find a four-week decline of 8 percent or more. And so I think right now the psychology is such, the mind-set of investors is such that they are simply remembering back to those dark periods.
GHARIB: So many analysts do say that it's normal to have a 10 percent market correction. Is that all it's going to take? Is it going to be only 10 percent or is it going to be more than 10 percent?
STOVALL: Well, I think certainly it will be more than a pullback. I believe that we could see a correction and it could be in the area of 10 to 15 percent. But I don't think it's going to turn into a new bear market. Reason being that the fundamentals in our opinion still remain fairly healthy. Economic growth is likely to be at about 2 percent this year, rising to 2.7 percent next year. We think corporate profits are going to come in at about an 8 percent year over year increase this year rising to a 12 percent increase next year. And actually we're trading at about an 18 percent discount to the average P/E ratio over the past 20 years. So I would tend to say that in general, valuations are likely to support this market as it continues to decline.
GHARIB: There are those people who do think this could be a bear market leading to a recession. What would change, what would have to happen for you to change your opinion?
STOVALL: Well, I think certainly we would have to see the market averages move beyond the 15 percent decline and heading toward the threshold of 20 percent that we regard as a new bear market. We're certainly already seeing those defensive areas such as consumer staples, health care, utilities outperform the more cyclical areas even though everybody is in the red these days. So I would tend to say that we would have to see a slowdown in economic growth projections as well as a whittling down of earnings forecast this year and next.
GHARIB: All right, Sam. Thank you so much for coming on the program. We really appreciate it.
STOVALL: You're welcome, Susie.
GHARIB: My guest tonight, Sam Stovall, chief investment strategist at Standard & Poor's.
