Sam Stovall’s Seven Rules of Wall Street Investing: IMCA Conference

Emerging market growth will continue to outperform at 5.4% in 2012

S&P Capital IQ’s Sam Stovall provided a welcome counterbalance on Tuesday afternoon to the pessimistic message delivered by Doubleline’s Jeffrey Gundlach earlier in the day at IMCA’s national conference in National Harbor, Md.

Sam Stovall of S&P Capital IQIn the direct style for which he is known, Stovall (left), who is an AdvisorOne contributor, presented his outlook for 2012 and beyond in a session titled, “Is it time to buy or bail? The seven rules of Wall Street.”

His conclusion? It’s time to buy.

“We could be at the beginning of a very long bull market,” Stovall told audience members. “‘But Sam, how could you say such a thing?’ Well, in the United States we have better than expected economic growth, China is due for a soft (rather than hard) landing and Europe is involved in a long-term refinancing operation that is seen as reducing the threat of a Lehman-style meltdown repeat.”

Stovall tempered his optimism somewhat by noting potential headwinds that concern him and his fellow analysts at S&P IQ, including rising gasoline prices, geopolitical tensions (“Who knows what will happen in the Middle East, especially with Iran?”), the potential for higher interest rates and changes in tax laws (“If the opposite pro is con, the opposite of progress is Congress").

He then summarized his recent forecasts, noting that the "upward market bias is likely to remain."

“We'll have a below-average U.S. recovery and a possible recession in Europe, but emerging market growth will continue to outperform at 5.4% in 2012,” Stovall said. “It will translate to a good, but not great recovery; one that will continue at half-speed.”

As far as underlying market fundamentals, he predicts solid earnings per share growth and low valuations. The S&P 500 is seen reaching 1,475 sometime in Q2, and he noted favorable average returns typically occur after severe corrections. He said it will be important to overweight cyclicals and underweight defensive positions. Lastly, from an investment perspective, he stressed the importance of dividends.

“History shows that at a time like this, it is better to buy than bail,” Stovall said.

Stovall then ran through the seven rules of Wall Street as he sees them, noting that not all are applicable every year, and the investor must be discriminating when choosing which to stick with in a given period.

1)      Let your winners ride, but cut your losers short

2)      As goes January, so goes the year

3)      Sell in May, then go away

4)      There is no “free lunch” on Wall Street (“Oh yeah, who says?” Stovall remarked)

5)      Don’t get mad, get even

6)      Don’t fight the Fed (at least for too long)

7)      There’s always a bull market someplace

Particularly with rule No. 3, he noted equity returns from November through April typically average 6.9%. Equity returns from May through October typically average 1.2%.

“Rules of thumb were created for a reason,” Stovall concluded. “Although past performance is no guarantee of future results, consider selecting those rules that have historically outperformed in at least two out of every three years, as well as those that have outperformed by at least 300 basis points per year. Remember that no one strategy works every year, but don’t abandon a strategy too quickly. Murphy’s Law says that it will probably start to work again the year in which you give up on it.”

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For complete coverage of the 2012 IMCA Conference check out AdvisorOne's special home page.

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