Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: The S&P’s Investment Policy Committee’s outlook report for 2012 noted that the median difference in annual price performance for the S&P 500 was 17 percentage points. Would you consider that a lot volatility on a year-to-year basis?
Stovall: Investors always like to say that the next year’s market performance will end up being similar to this year’s. But history says, “No, usually the opposite is true.” Rarely do we have two years that are similar to one another. I thought it was interesting to see that the median difference on annual price performance was 17 percentage points, and the mean was 22 percentage points. Depending on which style of average you want to look at, it basically shows that from one year to the next, there is usually a very wide difference. With the S&P 500 right now being down in the single-digit percentage basis, we could either be down anywhere from 20 percent-plus or up anywhere from 15 percent-plus if history repeats itself, which obviously there’s no guarantee that it will.
EQ: The IPC also noted that the S&P 500 should be catching its second-wind in the fourth year of the bull market, which is 2012. Where does do you project the market going?
Stovall: We have a year-end 2012 target of 1400. Based on the close of business on Dec. 13, that’s a little more than a 14-percent price appreciation in the coming 12 months. That would be in line with what history says. So depending on if we close lower in 2011, a 14-percent advance would certainly not be something that is out of the question.
How we arrive at the target is that the members of the S&P’s Investment Policy Committee–being fundamental analysts, historians, economists, and technicians–will use their own form of expertise to help decide where we will likely be a year from now. The target that we promote is the median of all of those individual targets.
EQ: With your target being 1400. It’s obviously not going to be linear, do you foresee a lot of volatility next year?
Stovall: Volatility probably is what you could say is the only reliable new normal. We have had an average of 14 days on a rolling three-month basis since the year 2000 in which the S&P has experienced a 2-percent swing on an intra-day basis. So for 14 out of 63 trading days per quarter, we end up with pretty high volatility on an intra-day basis. Yet over the last 13 weeks, that number has been more than twice the average, and back in October, we were looking at a number that was 3x the average. So because of high-frequency trading, or any variety of other reasons, that volatility is something that will probably be with us for quite some time to come.
EQ: What are your thoughts on economic growth both in the U.S. and worldwide in the coming year? Any specific market that will lead a recovery?
Stovall: S&P believes that we will probably see a less than 2-percent increase in U.S. GDP in 2012. Specifically, the number is 1.8 percent. That is fairly consistent with what IHS Global Insight–an economic research firm that we use for our global economic predictions–believes to be the average for all developed economies around the globe. The world itself is likely to see a 3-percent growth in GDP, but most of that growth will likely be coming from the emerging markets. The average is a shade below 6 percent, or 5.6 percent to be exact.
Much of that growth will be coming from India and China at more than 7.5 percent each. So when somebody asks what the economic growth is going to be in 2012, like most answers to financial questions, the right answer is, “That depends.” It depends on which regions of the world you are looking at.
EQ: Do you have any advice in terms of asset allocations or certain stock sectors to watch closely in the coming year?
Stovall: Our belief is that because we could be seeing a low double-digit increase in 2012 in terms of the price change of the S&P 500, we are recommending a slight cyclical bias from a sector perspective. We’re recommending investors to overweight Technology and Consumer Discretionary, but just to hedge our bets, we’re also saying maintain an overweight to Consumer Staples.
From an asset allocation perspective, we’re recommending investors to enter 2012 with neutral exposure. So for a hypothetical moderate-balance investor, they should have a 60-percent exposure to equities and a 40-percent exposure to fixed income.
The reason why we’re not sticking our necks out right now to be more aggressive with the allocations is because there is still an awful lot of uncertainty in China as to whether they’re likely to have a soft landing or a hard landing. We are, however, forecasting a soft landing.
But more immediate is the continuing concern surrounding Europe. S&P Economics believes Europe will slip into recession and be there in the first half of 2012, and emerge slowly in the second half. We think that Europe will experience at most a 0.4-percent growth for the full year. But, should Europe end up falling deeper into recession than we anticipate, that could have an adverse impact on U.S. economic growth and U.S. earnings and, as a result, U.S. equity prices. So that is why we’re currently recommending a neutral allocation.
EQ: Do you have any closing comments as we get ready to wrap up 2011 and head into 2012?
Stovall: I believe that our economy and our stock market have held up fairly well in the face of all of this global negative news. With all of the worrying in 2011 regarding a repeat of 2008 that has not come true, we would probably have to see one of the sovereign nations file for bankruptcy in order to have a slip into a new recession and a new bear market.
