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: The S&P 500 broke 1800 on an intraday basis earlier this week but has since settled back just beneath it. Does this barrier have significant implications on the market’s possible direction for the intermediate-to-longer term?
Stovall: I don’t think it has implications for the intermediate or longer term, but it does for the short term. When you have even-level thresholds—be they century marks or millennium marks—they do act as psychological resistance. I like to equate that to a rusty door, in which it requires several attempts before it finally breaks open. I think 1800 on the S&P 500 and 16,000 on the Dow could be similar in that it takes us several days or maybe even a week or so before we finally close above those thresholds.
EQ: Obviously, there are no guarantees, but the likelihood of that happening seems pretty certain?
Stovall: Well, we could find that all we did was break above those thresholds on an intraday basis, and then head into a new correction and not revisit those thresholds for several months. That’s always a possibility. We don’t think that’s likely to be the case, but there’s no guarantee.
EQ: In this week’s Sector Watch report, you found that the first three months of a new Fed chief’s tenure is historically a bit rocky. Can you elaborate on your findings?
Stovall: Yes, I looked at all the Fed chiefs back to 1914, when Charles Hamlin was the first chairman of the Federal Reserve, and looked at how the S&P 500 performed in the first three months, six months, and 12 months of their terms as chairman. I found that the first three months were the most challenging, with the S&P 500 posting an average decline of 1.3 percent and falling 54 percent of the time.
Obviously, these are not dramatic numbers, and I know several investors believe that historically the market has tanked whenever a new Fed chairman has come into place. But I think they’re experiencing recency bias in that the market fell 27 percent in the first three months of Alan Greenspan’s tenure in office.
I would say that there’s a possibility that we could see a little bit of bumpiness, but once we go six and 12 months down the road, history says that we’re likely to see smoother sailing.
EQ: It is expected that a decision regarding Janet Yellen as the next Fed chair will be made this week. She’s been described as the “Mother of All Doves.” In your opinion, is this nickname fair?
Stovall: No, we don’t think so. Our belief is that, while she does tend to mirror the policies of Ben Bernanke, she does realize that the economy remains fairly weak and that the economy will likely benefit from additional stimulus. We don’t think that she is, as you said, the “Mother of All Doves.” One reason is because she was instrumental in setting up the Fed’s 2-percent inflation threshold, above which, the Fed will likely start to raise rates in order to arrest inflation.
Granted, the Fed has more practice fighting inflation than they have deflation, so they probably might let inflation run a little bit longer if they believe that the economy needs the additional stimulus. Our belief is that they will try to protect that 2 to 2.5-percent inflationary threshold.
EQ: The market hates uncertainty more than anything. If confirmed, do you think a transition from Bernanke to Yellen will be a smooth one given that their positions seem aligned?
Stovall: I do. I think we got an idea of what would have happened if Larry Summers had been tapped as the next Fed chairman. I don’t think the market seemed to like that prospect. So with Janet Yellen—who is already Vice Chair and co-pilot of economic policy right now—I think the stock market will pretty much take it in stride because there really is not much difference between the current chairman and the upcoming one.
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