Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
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EQ: In last week’s interview, we discussed how the market held up pretty well during the government shutdown. From an economic standpoint, we’re now getting a clearer picture of how that stoppage affected fundamentals at least for the coming fourth quarter. What kind of an impact are you expecting to see?
Stovall: We still have an estimate that the U.S. government lost $24 billion on an annualized basis, and that fourth quarter GDP will be revised from an estimate of 3 percent on an annualized basis to 2.0-2.5percent. Along with that, we think corporate earnings could come down to only an 8.6-percent gain, rather than the 9.6-percent advance anticipated on Oct. 1. And who knows what’s going to happen to the employment data and other reports that will be coming out over the next month or so?
EQ: Depending on where you stand, a noticeable benefit of the standoff is the Fed’s expected delay of the tapering strategy. Based on the data you analyzed in this week’s Sector Watch report, have investors returned to the higher-yielding investments that they’ve been moving out of over the past few months?
Stovall: On an upper level, I would say, “Yes.” We saw a nice stock market surge from Oct. 15 through the end of the week on Oct. 18. We saw the S&P 500 itself advance 2.8 percent, and the two highest-yielding sectors in Telecom Services and Utilities gained an average 3.9 percent. But once you dug a little deeper into the sub-industries within the S&P Composite 1500, which consists of large, mid, and small-cap stocks, I found that it was actually the lowest dividend payers that did better than the upper-dividend payers. Maybe it will take a little bit longer for this tapering timetable to benefit the higher-yielding stocks within that index.
EQ: You’ve always advised that investors should not yield to temptation. What is a good way to examine dividend-paying opportunities right now?
Stovall: It’s always good to do your due diligence before making an investment decision. S&P Capital IQ’s U.S equity analysts cover 1,150 stocks, and 220 of them yield 3 percent or more. Obviously, not all of these 220 stocks have buy recommendations. In fact, only 79 of them do. So to trim that list down even further, I looked not only at our qualitatively driven Stock Appreciation Ranking System (STARS), but also at our quantitatively driven system called Fair Value.
I screened for stocks that have a buy or strong buy ranking, and I was able to whittle that list down to 18 stocks that are found in about eight sectors within the S&P. So it is a good diversified list.
EQ: Judging by the performance of the high-yielding sub-industries, should investors already be shifting their investment strategies away from the low-rates, high-yielders philosophy they’ve grown so accustomed to over the last few years?
Stovall: Well, we try to focus more on long-term investment opportunities. Our time horizon for the STARS is one year. So we’re not necessarily in the game of offering short-term trading advice. I do think, however, with the government simply deciding to decide later—meaning the first quarter of 2014—on the budget and on the debt ceiling, I think it’s given higher-yielding stocks a “Get Out of Jail, Free” card, at least for a limited time.
Once the Fed does decide it will begin its tapering program, we could find that the higher-yielding stocks take a backseat to the lower-yielding equities. But no matter which way you lean—income or growth—it still always pays to look toward valuations and growth potential before making an investment decision.