Austin Chamber of Commerce
Annual Economic Forecast, Nov. 23rd, 2009
Sam Stovall, Chief Investment Strategist, S&P Equity Research
Historical Truths on Decline & Advance
– Recent decline is the worst bear market since the depression of 1929-1932.
– But it’s only a little worse than what we experienced early in this decade, in the mid 1970’s, early 1960’s, 1946. etc. In the 1980’s we had a prime lending rate of 21%. The picture depends on what indicators you consider.
– Now is the time to pay attention to this tried and true rule of Wall Street: don’t miss the surge after the slump. Charles Shultz, as Charlie Brown, said, “When my ship comes in, I’ll probably be at the airport.” Make sure you’re paying attention and that you’re looking in the right place.
– In bear markets, the best places to invest are consumer staples, energy, healthcare, information technology and utilities. These are sectors that represent core necessities in all markets.
Expect 2010 to be Good, not Great
– Expect slow steady GDP growth, around 2%.
– Consumer spending remains sub-par due to high debt levels
– Unemployment levels will hover at 10% in 2010, down to 9% in 2011.
– Inflation will remain subdued by high unemployment.
– Interest rates will stay low. Any increases by the federal reserve are unlikely until the 4th quarter of 2010.
– The dollar will weaken into 2011.
– Corporate earning will accelerate in 2010.
o Look for a 30% increase year-over-year S&P 500, up to an average of $74 per share in 2010.
o Investors waiting for top line sales to improve before getting back in the market will miss their moment. Top line revenues typically lag behind corporate earnings by about 3 months.
Where Should Investors Go in 2010?
– Reinvest in S&P 500.
– Focus on companies that are paying increasing dividends to shareholders.
– Look to the S&P’s “Dividend Aristocrats” (Dividend Aristocrats are companies in the index that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years.)
– Spend money on quality.
– Work to diversify, and understand that the point of diversification is a portfolio where “some things zig, while other things zag. You don’t want all your holdings zigging together.”
– Look to the S&P’s 5 Stars within the strongest and most sustaining sectors:
o Consumer Staples (e.g. Tobacco, Coca-Cola)
o Energy (e.g. Chevron, Sempra Energy)
o Health Care (e.g. Johnson & Johnson, Abbott Labs)
o Information Technology (e.g. Time Warner, Yahoo)
o Utilities (e.g. Century Telephone, Florida Power & Light)