From the July 2010 issue of Investment Advisor • Subscribe!

July 1, 2010

Asset Allocation

Behind the Numbers, with Sam Stovall

"We're in a correction mode right now. The market has declined 10% to 20% from the S&P 500's closing high of 1,217 on April 23. We are more than 12% below that level," says Sam Stovall, S&P Equity Research chief investment strategist. To explain the stock market's current volatility, Stovall points to the financial reform bill now working its way through Congress, environmental concerns about the oil spill in the Gulf, tensions in Asia centered around North Korea and South Korea, and European debt levels. This combination of factors may force the global economy to experience a double-dip recession, he says.

Turning to the financial sector's performance, Stovall notes that of the 10 sectors S&P covers, financials comprised the best-performing category at the market peak, rising more than 160% since the low of March 9, 2009. But, he added, because the group experienced the greatest loss in the 2007-2009 bear market, falling 83% as compared with the S&P 500's decline of 57%, it also had the most to give up due to such a sharp rally. As for investors, Stovall says, they are now obviously experiencing a lack of conviction as they have started to wonder whether this economic recovery might be falling into a repeat of 2008.

"Just substitute sovereign debt for subprime mortgages," he says. "Investors who are sitting on the sidelines may be less enthusiastic about committing fresh capital to the market in general and to a financial services company in particular, but I would like to make it clear that I have no company-specific opinion."--Joyce Hanson and James J. Green

View the entire Asset Allocation page from the July issue here.

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