Sam Stovall Interview

Sam Stovall's insights are right on point in this interview he did for Nightly Business Report on Tuesday March 13, 2007.

There is no reason to panic in fact I see the market correction as a great opportunity to put cash to work.

Here's the transcript.

The Financial Pragmatist
Libby Mihalka

SUSIE GHARIB: Joining us with analysis of today's market sell-off, Sam Stovall, chief investment strategist of Standard & Poor's. Hi Sam.

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hello, Susie.

GHARIB: Are we looking at a correction here in the markets or is this the beginning of a bear market?

STOVALL: I think it's the correction, not the beginning of a bear market. I think certainly this has been something that's long overdue. On February 27 we snapped a 949 straight day period in which the market did not decline by 2 percent or more in one day. And normally we see an average of four of them per year.

GHARIB: But how big a problem is this sub-prime mortgage market?

STOVALL: Well, I think certainly because it bleeds it leads, and it is a cause for concern. And as a result it's, I think, triggered this slump in sentiment for investors right now primarily because of the uncertainty surrounding what kind of an impact it could have on the other areas of mortgages and mortgage-backed securities markets. So in general I believe investors are worried that possibly they did not anticipate this and that the uncertainty is that it could be worse than they're currently forecasting.

GHARIB: You talk about the impact on other mortgage markets. There's also concern about its impact on the economy and on corporate earnings. Do you see a huge spillover effect here?

STOVALL: Not really. Because when you break up the U.S. consumer into quintiles, the bottom 20 percent represents only about 8 percent of consumer spending and that's the category that typically would be involved in the sub-prime lending. Whereas the top 10% represents about 40% of consumer spending and that's the area that's not really being affected by this and is in the prime category.

GHARIB: I was talking to another market strategist the other day who was saying that he was very optimistic about the markets, saying because there there's so much liquidity out there, although today there seem seemed to be more people talking about a liquidity crisis. Which is it?
STOVALL: Well, I think there is the concern which could be exacerbating the markets decline today. Why financials fell 3 percent, why all 10 sectors in the S&P declined on the day is because people are worrying that the engine of growth, global liquidity, as you just mentioned, could start to dry up as lenders worry about extending credit where the credit is not due or at least not likely to be paid back. We at S&P basically believe that we're still likely to see a 15-10 target for the S&P 500 at the end of this year and we remind investors don't bail out of a lot of large financial institutions. Companies like Bank of America, like Citigroup, like Wachovia offer dividend yields that actually rival the 10- year yield on the bonds. So it's not just looking good compared with the S&P 500 but you're looking at 4.3, 4.4 percent dividend yields and quality rankings that are superior because over the past 10 years they have been able to increase their earnings and dividend growth.

GHARIB: Just a few seconds left. Some people think a cut in interest rates by the Fed would end all this selling. In a few words, what do you think?

STOVALL: I think certainly it could improve overall sentiment and add to the liquidity.

GHARIB: All right. We'll leave it there. Sam, thank you so much for coming on the program.

STOVALL: You're welcome, Susie.

GHARIB: We've been speaking with Sam Stovall, chief investment strategist of Standard & Poor's.