3rd Quarter Stock Report With Sam Stovall, Chief Investment Strategist at Standard & Poor's
Tuesday, September 30, 2008PAUL KANGAS: The third quarter has come to an end on Wall Street, and it was an ugly one. Joining me now to talk about the quarter and what's to come for stocks is Sam Stovall, chief investment strategist at Standard & Poor's. And, Sam, good to see you, as always.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Happy to be here, Paul.
KANGAS: Let's cut right to the chase. The major indices were down sharply, the Dow fell 4.4 percent, Standard & Poor's 500 tumbled 9 percent during the quarter, and the NASDAQ 100 got clobbered, falling almost 14 percent. What are these performances telling you about what's to come for the market?
STOVALL: Well, first off, Paul, it reminds me that September is the worst month for the S&P 500, whether you look back to 1990, 1970, '45 or '29, but it does tend to set us up for a pretty nice October, that since 1990 October has actually been the best-performing month for the S&P 500, gaining about 2 percent versus 0.7 for all 12 months combined, and the second- and third-best months are November and December. So yes, it gives me pause to think that maybe we could experience that end- of-year rally.
KANGAS: Was yesterday's 778-point drop on the Dow a capitulation indicating we're near a bottom?
STOVALL: I think it certainly was. I believe that in order for us to experience a pure 62 percent retracement of the prior bull market, which is typically what we experience in bear markets since World War II, we would have to tumble to about 1,075 on the S&P 500, which is pretty close to where we ended up just the other day at 1,106, so I think we're close. Also, if we look at the investor sentiment figures, whether it's the VIX on volatility, put-call ratios or investment newsletter writers, we're experiencing bearish sentiment levels that have not been seen since 2002.
KANGAS: How about today's rally? Was that fairly convincing for you? Impressive at all?
STOVALL: Well, it was. Early on, I thought it was simply a snap-back from having lost so many points yesterday and then also thinking that Congress would probably get together, put something out either by the end of this week or beginning of next week, but then when I saw the strength build as the day progressed, that implied to me that there is more strength and we broke above the prior low which served as resistance, 1,156 on the S&P, so that was encouraging.
KANGAS: What sectors do you see taking leadership here?
STOVALL: Well, if this is a bear market bottom, and there is no guarantee it is, typically we gravitate toward the early-cycle performers, consumer discretionary, industrials, as well as technology stocks. So companies such as Stanley Works (SWK) in consumer discretionary, which is also part of our dividend aristocrats group. In the industrials category, a company like Carlisle Companies (CSL). And then in technology either Hewlett-Packard (HPQ) or salesforce.com (CRM) could be companies that perform well.
KANGAS: We just have a minute left, Sam, but what is your year-end target for the major averages? Or is that kind of a moving target?
STOVALL: No. We believe that the S&P will close the year at about 1,250. Interestingly enough, in the first year of a bull market we gain about 38 percent. If you slice that up into four quarters, that's about a 9 percent advance which is pretty much what would be the bounce that we would experience from tonight's close. Also, if we're looking toward 2009, I think we're likely to see a low-teens improvement in earnings which would make investors feel a little better.
KANGAS: Sam, do you personally own or have other disclosures about those stocks you mentioned?
STOVALL: No, Paul, neither I nor S&P owns any of the stocks that I mentioned.
KANGAS: All right. Sam, I want to thank you for your insights once again.
STOVALL: I'm happy to be with you, Paul, as always.
KANGAS: My guest, Sam Stovall, chief investment strategist at Standard & Poor's.
