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: It seems like stocks have taken a bit of a breather since the Dow Jones Industrial Average broke its record last week; and the S&P 500 still a little more than half a percent away. Has that upward trajectory slowed a bit this week?
Stovall: Yes, it has. The trajectory is still working its way higher, but the speed has slowed—though, not by much. I think this is natural in which the closer we get to a technical threshold, the harder it is to break through it. Our belief is that we probably will not succeed the first time we attempt to break through. The S&P 500 could be repelled back down to the lower 1500 area before it takes a second run at the 1565 all-time high. We think it could possibly break through that level, but then may end up losing a little bit out of steam as it exhausts itself once it finally gets above that all-time high set back in Oct. 9, 2007.
EQ: Last week, we discussed where stocks might be able to go in the near-term if and when it breaks through its all-time high. However, in this week’s Sector Watch, you discussed the bull market entering its fifth year, and based on that average performance, things could be pretty bullish for the next 12 months, correct?
Stovall: If you look exclusively at history, there have been six bull markets that celebrated their fourth birthday, and five of those six went on to celebrate their fifth birthday. So you had a good percentage of these bulls go on and complete that year ahead. The average price change was a gain of 21 percent for these five, and only one of them posted a full-year price advance that was less than 16 percent. Interesting, but the market does seem to turn on its afterburners once it gets into the fifth year of a bull market.
EQ: Financials, Healthcare and Consumer Discretionary have led the way this year, with Technology and Energy really lagging. Do you see any of this changing if the bull market continues?
Stovall: If history repeats itself, and there’s no guarantee it will, the four sectors that have beaten the S&P 500 on average during the fifth year of a bull market since 1970 were Energy, Information Technology, Materials, and Industrials in that order. So you can see that there’s definitely a cyclical bias with the emphasis toward the middle and the latter part of the economic cycle. The underperformers were Consumer Staples, Telecom, and Utilities, which probably is not too surprising because they are defensive. If investors are going to focus on the cyclical stocks, then they are obviously going to shy away from the defensive areas. However, two of the leaders that we’ve seen in this bull market so far—Consumer Discretionary and Financials—have historically underperformed in the fifth year.
Right now, S&P’s sector strategy group continues to have an overweight recommendation on Consumer Discretionary, Industrials, and Healthcare, but who’s to say what the emphasis we will be recommending toward the end of year.
EQ: Could this bull market have enough legs to extend into a sixth year?
Stovall: It’s certainly a possibility, though it is a little more challenging to do. We’ve had three bull markets since World War II that continued on to celebrate their sixth birthday. Of the five bull markets that completed their fifth birthdays, only three went on to celebrate their sixth birthdays: ending in 1956, 1980, and 2000. So you’re not talking about a lot of observations. One thing that could be in our favor is that our economic recovery has been only a half-speed recovery, and as of late has been seeing an increase in its trajectory. So as a result, maybe this economic recovery could end up lasting longer than the average of 44 months going back to 1900. Perhaps it’s because we got out of the gates very slowly that we can maintain our endurance a bit longer.
EQ: What’s the average performance of a bull market in its sixth year?
Stovall: The average has been pretty good, posting a 26-percent gain on average. The three observations posted gains of 39 percent in 1956, 18 percent in 1980, and 21 percent in 2000. So again, once you get into the sixth year and you have the ability to complete it, investors remain fairly optimistic and probably even upset that they missed the bulk of that bull move.
EQ: So bull markets are in a way similar to fine wine?
Stovall: Yes, like fine wine, they are very few and far between to come across. But when you do find them, I encourage you to savor them when they do occur.
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