As Sam Sees It: What Can Wall Street Expect in 2013?

Sam Stovall |

Sam Stovall Chief Equity Strategist for S&P Capital IQEach week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.*

EQ: As you expected, Congress reached an 11th hour deal to avoid falling off the fiscal cliff. Stocks traded higher initially as a result, but lawmakers still have more work to do in the next two months. What are your thoughts so far on how the cliff was handled and how investors responded?

Stovall: I think the cliff was handled in a fairly irresponsible manner. I’ve said before that Congress could teach William Shakespeare a thing or two in drama. While it’s easy to criticize something that you’re not a part of, I still believe that it should not have waited until the 11th hour (or in this case, the midnight hour) before it was finally resolved. There’s just too much at stake. It’s not just an individual portfolio on the line because it affects people on Main Street as well as Wall Street.

EQ: Given that the resolution still leaves some issues to be addressed at a later date, was Wall Street’s reaction to the resolution overdone?

Stovall: Part of the overall fiscal cliff was resolved. So what Wall Street is doing is rejoicing that they at least have a partial playbook by which they can establish a strategy for going forward. Wall Street is less concerned about what is actually in the playbook than the fact they actually have a playbook that they can play by. You know as well as I do that great minds on Wall Street will find legal ways to get around most rules that they find distasteful. The problem had been that nobody knew what the rules would be going forward. Now we have a much better idea about that and what that is simply doing is releasing some of the pressure and tension that had been pressing on investors over the last several weeks. So while we may now be in an overbought situation in the near term, I think it’s a good indication that we will continue higher in the quarter or two ahead.

EQ: The dividend tax hike turned out relatively favorable compared to what was originally proposed. Do you see this having any effect for how investors will view dividend stocks going forward?

Stovall: I think based on the initial performances of the higher dividend-paying sectors, investors were pleased that they did not see a near tripling of their dividend tax rate, going from 15 percent to 44 percent. The plan originally was to raise the dividend tax to 39.6 percent and add the investment tax that was part of the President’s healthcare reform. That would have resulted in a near tripling of the dividend tax rate. In this case, however, the 15 percent now goes to 20 percent, and it’s a lot more palatable than it could have been. As a result, there is equal footing between capital gains and dividends. There’s still a disparity between dividend and ordinary income, which is what you would get in bonds, so I still think it makes equities the more attractive longer-term alternative.

EQ: 2012 turned out to be a pretty good year for stocks overall, especially when considering all the different headwinds investors had to deal with. How good was the last year for investors?

Stovall: Surprisingly, 2012 was much better than what a lot of investors had expected. Many people thought that the world was going to come to an end in 2012 like it did in 2008. That was certainly the thinking in regards to Wall Street’s performance, let alone some sort of cosmic event that had been foretold by a Mayan calendar. What I found was that during the year that just past, all major global equity indices—the S&P 500, Mid Cap 400, Small Cap 600, as well as the MSCI EAFE, MSCI Emerging Markets, and the NAREIT-Equity Only index—posted total returns (price plus dividends) that exceeded their averages since 1977.

For instance, the S&P 500 posted a total return of 16 percent in 2012 versus an average 12.1 percent over the past 35 years. In addition, other areas such as the MSCI EAFE was up nearly 18 percent as compared with the less than 13-percent average over the last 35 years. So except for the S&P GSCI Commodities and Barclays Aggregate Indices, which underperformed their longer-term averages, I think there was a lot for investors to rejoice about.

EQ: As you stated in a recent Sector Watch report, 2013 is expected to be anything but a normal year. Should investors be cautiously optimistic for the coming year?

Stovall: I think they should be. S&P’s Investment Policy Committee believes that we will close 2013 at 1550 on the S&P 500, which is a little more than an 8.5-percent price appreciation from the Dec. 31, 2012 close. Our belief is that the risk is to the upside, meaning we underestimate what the market could do this year. One thing, however, that investors should be aware of was that last year was unique in its lack of volatility and will probably not be repeated.

I went back to 1900 and looked at what was the low point during the year as compared with its prior year close. I found that the median percent decline of 12 percent for the first year of the President’s term in office was deeper than any of the other three years within the four-year presidential cycle. What that implies is that there could be a much more attractive entry point some time down the road in this calendar year. So don’t fear that you have missed out and that you want to pile into stocks early, because chances are you’ll be getting a more attractive entry point later on.

Editor's Note: This interview was conducted on January 2, 2013.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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CCO Clear Channel Outdoor Holdings Inc. Class A 5.84 -0.15 -2.50 197,293

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