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: Last week in our interview, you described the current bull market as unloved by investors. Is this a result of people being conditioned to fear bull markets because we had two bubbles burst in the previous decade?
Stovall: That’s a plausible reason. Since 2000, we have endured two mega meltdowns (bear markets in excess of 40 percent). The first one was from 2000 through 2002, which fell 48 percent, and the second one was from October 2007 through March 2009, which shaved off 57 percent. You have a lot of long-term investors who were irreparably harmed by both bear markets as well as some very new investors that don’t want to get hurt the same way their parents or grandparents were hurt.
The 1930s had three mega meltdowns that occurred from 1929 through 1942, so let’s just hope that, in this case, history does not repeat itself.
EQ: The primary concern is most likely whether the market has gone too high too quickly. Based on previous bull markets, the current one almost seems pretty orderly. What does that tell us about the prospects for new highs going forward?
Stovall: In some ways I could agree because it took us four years to get back to break-even from this mega meltdown. It normally takes us an average of five years, and it actually took us 25 years to get back to break-even from the Great Crash of 1929. However, what makes this bull market similar to many others is that in year three (2011), we endured a near-bear market decline.
Typically, if a bull market is likely to die an early death, it usually does so in the third year. If, however, it experiences a decline but does not slip into a new bear market, it tends to refresh and revive the existing bull market, allowing us to continue to advance for several more years. So I think that’s what happened this time around. We did go through the traditional mid-term slump, but have recovered nicely from it.
Also, if you look to the fact that we are now beginning to see all-time highs, and new successive all-time highs are still being recorded, that is not an indication of exhaustion. It is, rather, something one typically sees in a maturing bull market.
EQ: If and when the overall sentiment starts shifting heavily toward the bullish side, would that be an indication that we’ve approached the top?
Stovall: I wouldn’t necessarily say that it’s over, but it would be ripe for some sort of a pullback or even a correction because if there are too many people who are optimistic, then who’s left to buy? Who’s left to push prices higher, or even support them by increasing their exposure?
That’s why technicians will typically look to sentiment to help bolster their arguments of an upward or downward trend, because if too many are leaning to one side, chances are the other side is going to take the lead. I would say to look to sentiment to help you decide if we have a change in the short-term trend, but then look to the economy, interest rates, and valuations to decide whether it’s a pullback, correction, or even worse, the end of the bull market.
EQ: Over 100 companies of the S&P 500 have posted second quarter results thus far, and it seems like we’re getting pretty strong results. What are your thoughts so far?
Stovall: Instead of getting the 2.8 percent year-over-year increase in operating earnings that was initially expected by S&P Capital IQ consensus, we’re now on the order of a little closer to a 4.2-percent increase. So it’s pretty weak from a historical perspective, but it’s a lot better than what we thought we would get early on. We’ll probably see that number increase before all is said and done because in the past 10 quarters, the difference between the expected growth and the realized growth was between 4 and 5 percent. So you could say that we’ll end up closer to 7 percent than the initial 3-percent reading.
If there is a concern that I have, it’s the top-line growth. Revenues are expected to be a little bit better than was anticipated at the beginning of the quarter, but that’s not a lot to write home about. At the beginning of the period, we were expecting to see a decline of 1.1 percent in revenues, and now we’re only expected to see a decline of 0.6 percent. Statistically, it’s an improvement but I’m not thrilled with the fact that revenues are not in positive territory. There will come a time when companies have a very hard time tightening the belt even further or engaging in even more share repurchases, and will, as a result, need top-line growth in order to improve the earnings going forward.
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