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: We’ve discussed that the S&P 500’s performance from the July 31 to Oct. 31 period is usually a pretty accurate predictor of the next president. With Halloween ending tomorrow, who should we expect to win the election?
Stovall: If you look at exclusively at the three-month performance for the S&P 500, the incumbent has had over an 80-percent re-election rate whenever the market has been up in that August, September, and October timeframe. So based on that indicator, it would point to an Obama victory come the early part of November. What I found interesting, however, was that somebody had recently asked me what if we just looked at October’s performance alone? So going back to 1900, if the market was up in October, the incumbent was re-elected 78 percent of the time, and whenever it was down in October, the incumbent was replaced 79 percent of the time. Basically, that is a pretty consistent indicator based on October’s performance, but it does contradict the three-month indicator. So what it boils down to is you can always use statistics to prove whatever angle you’re trying to show.
EQ: Over half of the S&P 500 companies have reported thus far, and it seems like the third quarter is on pace for positive earnings growth. Which sectors have been the brightest surprises?
Stovall: The market itself has been little bit surprised, especially when you think about all of the headline companies that have either missed earnings, missed revenues, or provided less than buoyant guidance. So to then find out that 62 percent of the companies on the S&P 500 have beaten their estimates, which is equal to the 10-year average, I think investors would be quite surprised by that statistics. The three sectors that have done even better have been Financials, Health Care, and Consumer Discretionary. All three have beat rates in excess of that 62 percent level. In the case of Financials, I think you can say that they did well because of the earlier writedowns for loan loss positions that were not taken, and they were able to bring that back into operating results. In Consumer Discretionary, we see consumers spend more than investors have anticipated, and with Health Care, some of the pharmaceuticals have done a little bit better than expected. Since pharmaceuticals represent more than 50 percent of the S&P 500 Health Care index, they certainly have contributed to that beat rate.
EQ: Hurricane Sandy shut down Wall Street for at two consecutive days this week, during a pretty critical stretch for the market. When was the last time investors have seen this happen? How did the market respond during those times?
Stovall: The last time investors saw Wall Street close for more than two days in a row was on September 11, 2001. Obviously, that was a man-made crisis, and not a natural crisis. So investors responded quite negatively because they weren’t sure what was going to happen next—either here in the U.S. or from a global perspective. The last time Wall Street was shut down by nature, however, was during the blizzard of 1888, in which you had snow drift as high as nine feet in New York City. As a result, New York decided to move its electrical wiring underground rather than have it above ground. So I would tend to say that Wall Street does not have a lot of history to go on, but because this was a natural event and not a global crisis of confidence, it did not result in panic.
EQ: Though it’s still too early to tell, estimates are that the destruction caused by Hurricane Sandy has totaled in the range of $20 billion so far, pushing it into the top 5 costliest hurricanes in recent history. Do you foresee this adding any additional turmoil to the market for the intermediate or long term?
Stovall: Certainly for the near-term there’s a lot of turmoil. But as you said, the estimates places on the order of Hurricanes Ivan and Wilma, but certainly about half as bad as Andrew and a quarter as bad as Katrina. So it is something that has devastated the local marketplace here in the Northeast, but hurricanes by themselves are typically localized catastrophes and don’t turn into national or global negative events. While we saw Katrina in 2005 and other major hurricanes, the only time we really had a hurricane that then saw a decline one, three, and six months after for the S&P 500 was after Ike in 2008. However, that had a lot more to do with the meltdown of Lehman Bros. than it did with the actual hurricane.
On average going back to 1965, the S&P 500 has gained 3 percent one month after a major hurricane was formed; up 4 percent three months after; and up 6 percent six months after. In general, the market continues to move in an upward trajectory following hurricanes, but that probably has more to do with economic factors than it does natural ones.