Bigger companies will do better than smaller ones because they hold so much cash and will be viewed as safer, according to an Aug. 7 Citigroup Inc. (C) note. Investors should also look for stocks that pay dividends as the world’s largest economy slow, Oppenheimer & Co. wrote in a note today. JPMorgan Chase & Co. (JPM) said that while the next two weeks may be “turbulent” for equities, the overall impact will be minimal.
Standard & Poor’s lowered the U.S. long-term rating one level to AA+, from AAA, after markets closed on Aug. 5 while keeping the outlook “negative,” citing less confidence that Congress will end Bush-era tax cuts or tackle entitlements. Fitch Ratings and Moody’s Investors Service still hold a AAA rating. Some strategists say that while the downgrade may hurt the economy, last week’s 7.2 percent drop in the Standard & Poor’s 500 Index shows equity investors were anticipating it.
“The medium- to long-term effects of the U.S. sovereign downgrade are minimal, even as the short impact could be turbulent,” Thomas Lee, JPMorgan’s equity strategist in New York, wrote in an e-mailed note.
S&P 500 Performance
The S&P 500 fell 3.7 percent to 1,155.64 at 10:35 a.m. in New York today, extending its decline since July 22 to 14 percent. The index’s 4.8 percent tumble on Aug. 4 marked its biggest daily drop since February 2009.
The downgrade may spook investors, causing sentiment to grow more bearish in the short term, strategists at Barclays Plc, Citigroup and JPMorgan said. Rising cash levels relative to debt and earnings growth should push the S&P 500 higher by the end of the year, they said.
Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc (BARC), said he may lower his 1,450 year-end target if sales in the back-to-school season are disappointing, signaling a hit to confidence that may impair consumer spending. Investors should buy companies most-tied to the economy, since they will benefit first when stocks rebound, he said.
‘Overblown’ Recession Fears
“The fears of a global recession are way overblown and that the actual effect of a downgrade is very little in the short run,” Knapp said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “When clients have asked me, ‘Should I be moving into defensive high-yielders?’ my answer is no.” He said, “Cyclicals will lead the rebound so you run the risk of whipsawing yourself if you go to defensives here.”
While Goldman Sachs Group Inc. (GS) lowered its year-end target for the S&P 500 to 1,400 from 1,450, Oppenheimer’s New York- based chief investment strategist, Brian Belski, held his 1,325 estimate, saying dividend-paying stocks are an “excellent strategy for the current market environment.”
Companies in the index have put money aside and paid down debt after the worst financial crisis since the Great Depression. Cash on corporate balance sheets excluding financial, utility and transportation stocks represented about 9.7 percent of market value as of March 31, up from the 20-year average of 6.7 percent, S&P data show. Those large companies with strong balance sheets may benefit in a risk-averse environment, according to Citigroup and Morgan Stanley.
‘Attractive’ Cash Levels
“Given attractive corporate cash levels, one could see large well capitalized companies benefit from money flows seeking respectable returns with relative safety,” wrote Tobias Levkovich, Citigroup’s chief U.S. equity strategist in New York. “From an equity market perspective, this could augur well for larger market cap entities.” Read More
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