Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: Earlier this week, the S&P 500 touched its four-year high but immediately retreated a bit. What are your thoughts on this low volume, slow-and-steady run that stocks have been in?
Stovall: Well, I’m not really surprised that the market ended up pulling back after running into pretty stiff resistance. In the sense, if you ran into a brick wall, you’d probably walk away with a bloody nose too. Traditionally, what we find is that it takes several attempts to break through resistance just like it takes several attempts to open a rusty door. But when you finally do, you spring higher. So I would tend to say that from a technical perspective the S&P 500 will probably go down no further than the 1370 to 1390 area, which we think represents a good buying level. Actually, both historians and technicians are the bulls today looking at channels and historical patterns to say that the S&P 500 could approach 1500 by the end of the year.
Yet economists and fundamental analysts are saying that there are an awful lot of headwinds still out there. So I think that one of the reasons why volume is low is because the economists and fundamental analysts are getting very nervous about all of the headwinds. But also, let’s face it; August is the preferred month to take summer vacations, so volume is traditionally relatively low. So I would tend to say that maybe we end up with a bit of digestion. Also, it’s important to remember that September is traditionally the worst month of the year, and in an election year, it has posted a decline, though at a less than .10 percent on average. So maybe we’ll have a little bit of a breather early on, but more likely will gather strength as the year comes to a close.
EQ: While this week has been relatively quiet, investors will most likely be focusing on next week’s Republican National Convention and then the subsequent Jackson Hole meeting heading into the weekend. Do you anticipate more short-term volatility and knee-jerk market gyrations as we approach these events?
Stovall: I think that we probably won’t see volatility and gyrations as a result of the Republican Convention, but probably if the market is not pleased with what they hear coming from Jackson Hole. Many think that the market is advancing due to a possibility of a Republican victory in November, so I think certainly that rhetoric emanating from the convention will be key to maintaining the enthusiasm and the optimism that investors have toward a Republican victory.
No news, however, will likely come out of Jackson Hole in our opinion. Our feeling is that the Fed will likely wait until the September FOMC meeting before really saying anything worth listening to—whether that is in regards to extending the date as to how far out they will maintain a new zero interest rate policy or whether they even decide to embrace a third round of quantitative easing. That will wait until the September FOMC meeting when they will be required to submit their economic projections and we’ll also have one more employment report and will also be seeing additional reports that indicate whether our economy needs further stimulus.
EQ: With the pressure and expectations seeming to be easing off the Fed to enact QE3, is Wall Street is now shifting more of its focus onto Congress to address the impending fiscal cliff?
Stovall: Yes, I think it is because initially investors were a little concerned that we were not going to get that additional jolt from the defibrillator. But then the thought became that if we don’t, then that means the patient is recovering on its own and that’s actually a good thing. It’s also something that has longer-lasting effects because if all the Fed is likely to do is to give an additional jolt of stimulus, who knows how long and how far it’s going to go in terms of a market response? So I think those on Wall Street would prefer data that shows an improvement in the economy.
What is not improving is the relations on Capitol Hill. Congress continues to be stuck in gridlock. So yes, I think investors are very worried about the impending fiscal cliff and are very much worried that Congress will be sitting on its hands, not only up into the early November elections, but even beyond because the people who are voted into office as a result of the election will not be sworn in until late January of 2013. So we could easily fall off the fiscal cliff early in 2013 and only once the new Congress is sworn in, could we end up seeing any headway being made to resolve this fiscal impasse. So while it might not lead to a new recession, it certainly could lead to instability within the U.S. equity markets.
EQ: In this week’s Sector Watch, you examined the impact of Republican and Democratic National Conventions and their short-term impact on the market. If history serves correct, what can we expect this time around?
Stovall:If history repeats itself, and there’s no guarantee that it will, we’ll end up seeing that the market is a little happier after the Republican convention than they will be after the Democratic convention. To go into specifics, during all 16 Democratic conventions since World War II, the S&P 500 declined in price nine times, and recorded a median price decline of 0.23 percent. In the five days following the conclusion of the Democratic convention, the S&P 500 fell in price 10 times and slipped a median 0.34 percent.
For Republicans, the S&P 500 declined only five of 16 times, and recorded a median price advance of 0.32 percent. In the five days following the conclusion of the Republican convention, the market declined eight of 16 times, and was basically flat. So this time around, if history does repeat itself, the S&P 500 will likely rise during the upcoming Republican convention and the five days following, but then fall slightly during the Democratic convention before resuming its upward track in the subsequent week.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer