Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
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EQ: As 2013 wraps up, it’s safe to say that it was quite an impressive year so far for stocks. Assuming the market doesn’t suffer a major decline in the coming weeks, has the S&P 500’s performance exceeded your initial expectations this year?
Stovall: Yes, it did. Initially, we thought we would see a high single-digit, low double-digit gain because we thought the economy was going to be continuing to climb at a slower-than-trend pace. We were getting a little long in the tooth in terms of the age of this bull market, but the market has surprised many with its strength. As a result, that has allowed those investors who did not try to jump the gun by selling into strength to keep benefiting from its continued move higher.
EQ: Is there a high likelihood of investors taking profits in a meaningful way before the year ends, or do you think they’ll let their winners ride?
Stovall: History would say that investors tend to let their winners ride. Even if we’ve seen the S&P 500 up by 15 percent or more as of the end of November, the traditional advance in December tends to be a little better than it normally is during all years since World War II, which is a gain of a little less than 2 percent. The frequency of advance, which is more than three out of every four years, stays intact. What it basically says is, more times than not, investors just stay the course rather than trying to lock in profits and take the rest of the year off.
EQ: Most long-term investors are already looking to 2014. In this week’s Sector Watch report, you said that investors shouldn’t expect a repeat of 2013, though a good market is still probable. Has this been the case historically?
Stovall: Yes, it has. Historically, good years have followed great years. On average, the S&P 500 gained 10 percent in those years following advances of 20 percent or more. In addition to beating the more normal increase of about 8.5 percent, the frequency of an advanced went to nearly 80 percent from a more normal rate of 70 percent. When you have a higher average price change and an increase in the frequency of a gain, it would imply, but certainly not guarantee, that we could still see a good year in 2014 following the great year in 2013.
EQ: The 2014 outlook from S&P Capital IQ analyzed the market from many perspectives. From a sector perspective, which ones look primed to outperform in 2014?
Stovall: We continue to have overweight recommendations on the Consumer Discretionary, Industrials, and the Healthcare sectors. All three have good price momentum and are also expected to show good earnings increases in the new year. In our opinion, they are not trading at excessive valuations. We have underweight recommendations on the Telecommunications, Utilities, and Materials sectors.
Utilities and Telecom have concerns regarding their high yields that could be affected by the increase in interest rates that go along with the tapering of the Fed’s bond buying program, which we think could start even as early as December.
EQ: Does having a bull-market year—which is a gain of 20 percent or more—in the late stages of this current secular up market affect the shelf life of the current run?
Stovall: Not really. Bull markets tend to last five and a half years, and the crucial year is not necessarily the year we’re in now or even next year. The crucial year is year three. If we make it past year three, it’s like someone who hits age 65 having a greater chance of making it to age 75 and age 85. That’s why more than 80 percent of the bull markets that reached their fourth birthday went on to celebrate their fifth birthday, which is what we’re doing right now.
Since 2011 was our third year within this bull market, and we were able to continue to survive and not slip into a new bear market, that—in a sense—refreshed the dials and, in my opinion, gives us a greater likelihood that this bull market will not be dying anytime soon.