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 S&P 500 received a bit of a scare earlier this week on Monday when it posted the largest single day drop since November 2012, as well as putting February’s pace for a positive close at risk. That said, it looks like stocks want to move higher from here. Was this bounce a good sign for bulls?
Stovall: I think it was, because a lot of bulls as well as bears were expecting us to experience at least a decline of 5 percent, which would’ve put us down to about the 1425 level on the S&P 500. However, because we had what you would call a capitulation day in which the S&P 500 fell by more than 27 points, and the Dow Jones Industrial Average fell by more than 200 points, maybe investors felt that was all we were going to get. As a result, we’ve had a couple of days of very strong moves higher, and therefore I would tend to say that it’s an indication that those left on the sidelines looked upon this as a better re-entry point, which could end up pushing us closer to the all-time highs at 1565 on the S&P 500.
EQ: In this week’s Sector Watch, you discussed what an up market in January and February could mean for the remainder of the year. What would a positive close for February—combined with that of January—signal for investors from a historical standpoint?
Stovall: It would actually give another thumbs up for what’s going to happen in all of 2013. First, we were pleasantly greeted with the end of January, and the January barometer says that, “as goes January, so goes the year”. The market has risen in the remaining 11 months of the year 84 percent of the time since 1945 whenever we’ve had a higher market in January. Taking that one step further, if you have the market up in both January and February–which has happened 26 times since World War II–the market posted a full-year total return that was positive 26 times. So that equates to a batting average of a thousand. Of course, here’s the opportune time to say that even though it is 26 for 26, this indicator is no guarantee that the market will move its way higher in 2013.
But I do have to say that the market being up in January and February is almost like an octogenarian who is willing to give up his cherished afternoon nap out of fear of missing something interesting. Investors didn’t want to digest gains in February the way they normally do—February is the second-worst performing month for the market since WWII—and as a result for us being up for both months, maybe it’s because investors didn’t want to be on the sidelines for too long and miss out on a continued upward move in stocks.
EQ: Do you see a stronger rotation into the more cyclical sectors as we enter into March?
Stovall: History would say, “Yes.” Going back to 1970, March was the third-best performing month of the year on average from a price standpoint. It also posted the second-lowest standard deviation of monthly returns. Therefore, we usually see a rotation back into equities in general, and cyclical sectors in particular. So it’s not a surprise that if the market was a bit cautious in the second half of February, then it’s reason to believe that the defensive groups such as Consumer Staples, Telecom, Healthcare, held up better than the cyclical sectors. However, if we do see a traditional rotation back into the cyclical sectors, then areas like Consumer Discretionary, Financials, Industrials, and Materials should end up doing better this month.
EQ: Are investors taking the sequester deadline too lightly or is this a case of the boy who cried wolf one too many times?
Stovall: I would tend to think that it is the latter. One reason is if you look to the price performance of the Aerospace and Defense industry group, it has held up very well, not only in the past month, but also over the past 13 weeks. The implication here is that if there is to be a big sequestration that is going to cut off the funding of defense stocks, you would probably see that in the returns for these companies. On the other hand, we’ve actually been seeing an improvement on these stocks. So investors believe that the sequestration is simply another opportunity for the Republicans and Democrats to go to battle over ideology, but in the end, they still know what’s best for the country and that means to not embroil us in too much uncertainty for too long that would, at the same time, end up tightening our belts too quickly.
