As Sam Sees It: Despite Nearing Record, S&P 500 Still Attractive Now for Long-Term Investors

Sam Stovall |

Sam Stovall Chief Equity Strategist for S&P Capital IQ

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 sequestration deadline came and went and investors were more or less seemed completely unmoved. Couple that with the news regarding China’s real estate bubble, would you describe this current upward move as encouragingly resilient or recklessly stubborn?

Stovall: I guess I would call it more on the side of being encouragingly resilient, only because I would not agree with the term “reckless”. The market is moving higher because the economy around the world seems to be moving away from the trough quarter, which we projected to be the fourth quarter of last year, and 2013 is expected to show successively improved quarters. Also, U.S. corporate earnings bottomed in the middle of 2012, and according to S&P Capital IQ, consensus estimates appear to be continuing to work their way higher in 2013. If you couple that with relatively low valuations, low inflation, and low interest rates, we can appreciate why the market is working its way higher. So I wouldn’t necessarily call it reckless, but I would call it stubborn.

That said, I don’t think it’s going to last forever without any kind of digestion of recent gains. The U.S. equity markets have performed quite nicely since the beginning of this year. We had a favorable signal in January with the January Barometer. We also had a favorable signal with both January and February being positive, and that has typically led to a full-year advance for the S&P 500. So right now, it looks as if the record level of 1565 on the S&P 500 is serving as a tractor beam, pulling up investors toward it.

EQ: If and when the S&P 500 breaks through 1565 to establish a new all-time high, can investors expect more running room?

Stovall: History says, “Yes, you can expect some room to run, but not a lot.” I equated it to the messenger from Marathon, who ran the 26 miles only to say, “Rejoice, we conquer!” before falling dead at the king’s feet. Going back to World War II, the market has advanced on average about 3 percent after recapturing all that it lost in the prior bear market. It then typically hit a brick wall within two months. The good thing is that of these observations, five times we had a pullback (5 to 10 percent decline) and six times we had a correction (10 to 20 percent decline), but in none of these observations did we fall right back into a new bear market. Of course, history is a great guide but it’s never gospel.

EQ: Given that this current bear market is over three times as long as an average one, could that have an impact on whether or not we hit a glass ceiling above the new high?

Stovall: First off, readers are going to be saying to themselves “Don’t you mean bull market rather than bear market.” Since we have yet to get back to the high set on Oct. 9, 2007, you could say that we are currently in a cyclical bull within that secular bear market.

Certainly that secular bear is coming to a close, and therefore it would be five or so years in which the market took to get back to break even. Could that provide us with some more longevity in terms of movement beyond eclipsing the old high? I think that it could probably help in terms of maintaining this bull market last longer before falling back into another bear market, but I don’t think it causes this advance to be able to sidestep a digestion of recent gains. It’s sort of a fact of bull-market life that you do have to reset the dials every so often.

EQ: There may be some passive investors that felt like they missed the Dow’s move to a record high, and may be considering playing catch-up. What would you advise them to do if they’re looking to enter the market more aggressively right now?

Stovall: Well, I think because valuations do still look relatively attractive—obviously not as attractive as they were in 2009—but investors are not buying at the peak as if they were buying in 1999, for example. The economy still is improving in its overall trajectory, earnings are improving as well, and if we start to see higher interest rates, then I think people would be moving out of bonds and into equities. In the longer term, people who put money to work today will see an improvement in their portfolio in the next several quarters or years, but don’t be surprised if the market does start to go through its digestive phase relatively soon.

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

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