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Sam Stovall of Standard & Poor's and Christopher Zook of Caz Investments had some bad news and some good news. They each think the economy still looks awful — but there are ways to play it.
"We're going through a corrective phase now," said Stovall. "A digestion of the 40 percent advance off of the March 9 lows."
How bad will it be?
"We could see the S&P drop to 800 to 825" before the picture is clear, he cautioned.
Pointing to the "head and shoulders" formation that many technical analysts are seeing, Stovall said the "height between the shoulder and head could bring us down to the 830 level."
And he believes "we'll probably go down to about 810."
A big downward driver: Stovall predicted that unemployment could stay above 10 percent through the first half of 2011.
Zook agreed that "the key is unemployment." And he says the job numbers will stay bad, if not get worse, as the stimulus "won't work, at least not in its present form."
Counterpoint:
Another downward pressure: corporate outlooks. Even if earnings look stronger, Zook believes "people will be disappointed" by company guidance.
He says the market rally "went too far, too fast; we need to consolidate those gains."
"The pullback could be as much as 10 percent," he predicted.
Recommendations:
Zook sees investment opportunity in "the stagflation camp." As part of that sticky economic morass involves inflation, one can isolate the sectors that will benefit from rising prices and rates.
Specifically, Zook looking for a drop in commodity stocks: "We'd be a buyer in the dip."
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Disclosures:
Disclosure information was not available for Stovall, Zook or their companies.
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