A Look at the 2nd Quarter Highlight Reel
Tuesday, June 30, 2009PAUL KANGAS: The second quarter was a winner for investors, marking double digit gains on all the major indices. Sam Stovall, chief investment strategist at Standard & Poor's joins us to review the quarter and look ahead. Sam, welcome back to NBR.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hello Paul. Good to talk to you again.
KANGAS: Let's have a look at some of these gains that the major indices made and get your thoughts on that quarter.
STOVALL: Well, Paul the S&P 500 gained the most this quarter than it did going back to December quarter of 1998 following the long-term capital management decline.
KANGAS: Let's look at some of the individual gainers among stocks. And we see two big, big financial institutions, Bank of America (BAC) and Genwerth (GNW) looks like the financials dominated the second quarter rally.
STOVALL: They sure did. I think it's because a lot of investors priced these companies to go out of business and when they did not, they had the greatest upside potential.
KANGAS: How about Wynn Resorts (WYNN), how did that make such a big gain?
STOVALL: Here is another situation of worst to first.
KANGAS: Simple as that. OK. Let's have some worst stocks in the major averages, Wal-Mart (WMT) of all stocks to be in there, what happened there?
STOVALL: Basically I think it was because they held up so well during the bear market that investors are now rotating into more of the discretionary retailers.
KANGAS: And Keycorp (KEY), a financial that did not do well, why?
STOVALL: No, it didn't do well because of their fairly hefty exposure to the construction market.
KANGAS: And Cephelon (CEPH), what was the problem with that company?
STOVALL: Problem there was one of its phase three trials.
KANGAS: OK. Let's now look ahead at the second half. Are we going to retest the lows?
STOVALL: I think there's a very good possibility, Paul, that we could see a correction. I think it will be on the order of 10 to 15 percent possibly bringing the S&P 500 down to about 800 to the 825 level. But I would then caution investors not to get notice, no to bail out and move in to cash because I think better times are ahead.
KANGAS: This chart pretty well illustrates what you think is going to happen then?
STOVALL: Exactly. Every rally off of these corrections since 1932 has brought us an average gain of 36 percent. But of course there's no guarantee that it will happen this time around as well.
KANGAS: So in plain English, you see a near-term pullback followed by a solid rally?
STOVALL: Yes, I do Paul. And I think that if we do get the green shoots morphing into young saplings, we do get an expansion, an improvement in corporate earnings that we could see stocks outperform bonds, small caps out perform large caps and these cyclical sectors out perform the defensive ones.
KANGAS: What are the best instruments for investors to play this coming rally if it occurs?
STOVALL: Well, certainly, Paul, instruments that offer good flexibility are ETFs, so in particular, if you are looking for large cap you could go to SPY, S&P 500, or the MDY for the mid cap 400.
KANGAS: The second half, what do you think -- which sectors will dominate that period of time?
STOVALL: Well, I think if we do get a classic rebound off of this correction, we probably could see the cyclicals do fairly well such as the technology sector. Energy should do relatively well and I also believe that we could see improvement again in the discretionary industrials and financials.
KANGAS: We have a minute left. Your thoughts on the economy and the recovery of the economy.
STOVALL: Well, I think that basically the free fall is over. We probably will end up posting positive advances to economic growth in the fourth quarter of this year, but only by about 1 percent. And we only look for a 1.3 percent gain in all of 2010. I think unemployment will peak in 2010 but it will be pretty much a jobless recovery so I would expect things to get better, but I wouldn't expect a V-shaped recovery.
KANGAS: There are some worry spots on your radar scope, are there Sam?
STOVALL: There certainly are, Paul. Certainly the World Bank recently said that they were downgrading their estimates for emerging market growth. I'm a little concerned that maybe we're getting too far ahead of ourselves in terms of corporate earnings improvements and what if Treasury yields start to spike up once again? Then that could slow the recovery in housing.
KANGAS: Sam, as always I want to thank you for sharing your insights with us.
STOVALL: My pleasure, Paul.
KANGAS: My guest Sam Stovall of Standard & Poor's.
GHARIB: So Paul, we onto the third quarter right?
KANGAS: Right you are and away we go.
GHARIB: Let's hope it's a good one.
