As Sam Sees It: Central Banks in Focus As Market Enters Key Stretch

Sam Stovall  |

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: The FOMC acknowledged that the economy slowed in the first half of this year, but made no announcement of any new monetary policy moves. What were your thoughts on the Fed’s statement?

Stovall: Most people did not expect the Fed to make any kind of game-changing announcement today. Recent economic data, while weak, has still been slightly better than expected. As a result, I think investors felt that if the Fed is going to do anything, they probably will make the changes in August after getting another round of payroll data. More likely, however, it could be in September when they are required to come up with economic projections for 2013 and estimates for employment. Also, with a press conference scheduled by Fed Chairman Bernanke after the September FOMC meeting, chances are that they are more likely to do something meaningful at that meeting. However, as I’ve said before, history has shown that the Fed has engaged in raising and lowering interest rates even in October of a presidential election year. So just because they don’t do something in August or even September, doesn’t mean that they’re not going to do anything in October.

EQ: Last week, the market surged on ECB President Mario Draghi’s statement on backing the euro, and essentially raised the stakes on a major announcement tomorrow. Has the bar been set too high here for an ECB move?

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Stovall: I think certainly the bar has been elevated, because ECB President Draghi said that the ECB stands ready to do whatever is in its means to keep the euro together, which sounds like a hint that they do plan on doing something at their upcoming meeting. Our belief is that the odds are very high that we do see another rate cut and maybe even see some modest bond buying. But we really don’t see any kind of shock-and-awe bond-buying program or even a granting of a banking license to European Stability Measure in order to be able to purchase bonds of member banks. In general, my feeling is that the ECB might end up disappointing because maybe they did set the bar a little too high, but all the central bankers are focusing on trying to stimulate their economies by increasing liquidity.

EQ: Now that August is here, the market has entered a critical three-month stretch that has traditionally been pretty reliable as a predictor of the winner for presidential elections. What can the market’s performance in the coming months tell us?

Stovall: Well, if history is any guide—for it’s never gospel—since 1900, whenever the market has risen in the August through October period, the incumbent has more frequently been reelected than not. The incumbent has been reelected 80 percent of the time whenever the market has risen. On the flip side, whenever the market has fallen during this three-month time period, 88 percent of the time the incumbent has been replaced. So just looking at it from a historical perspective without factoring in the personalities, the condition of the economy, and so on, if the market rises, chances are the incumbent will stay right where they are, and voters are not likely to be willing to change courses in mid-stream.

EQ: In this week’s Sector Report, you noted that there have been only three occasions in which the economy was so bad that voters chose not to re-elect the incumbent – in 1932, 1980 and 1992. How does the current state of the U.S. economy compare to those periods?

Stovall: I think in all those periods, we were dealing with very challenging economic scenarios. In 1932, we had fallen close to 90 percent in the Dow Jones Industrial Average. The U.S. economy had gone from boom to bust, and everybody was hoping that happy times would be here again. So they were very happy to remove Herbert Hoover in place of Franklin Delano Roosevelt. In 1980, we had stagflation—stagnant economic growth with inflation—so voters were very willing to remove Jimmy Carter. In 1992, when George Bush Sr. was surprised that socks cost as much as they did, voters realized that he was out of touch, and therefore was not likely to be able to turn the economy around any time soon. The economy is very important, and if the market ends up declining as it has frequently when investors have not reelected the incumbent, it’s an indication that investors are not very pleased with how the country is being handled.

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