EQ: November was a nasty month for the market, both in the U.S. and around the world. How bad was the month for investors?
Stovall: On a month-to-date basis through Nov. 25, it was pretty bad. As we entered November, investors were breathing a sigh of relief because we had such a nice bounce in October, and many were thinking that would continue as we moved into November. Yet, through Nov. 25, we have found that international stocks--whether they're in developed or emerging markets--were down close to 12 percent. Real estate investment trusts (REITs) were off 10 percent, and U.S. large and small cap stocks had declined 7 and 9 percent, respectively. Even in commodities, the broadly based S&P GSCI index of commodities slipped 2 percent and gold was down 1 percent. Only bonds, the U.S. dollar and crude oil rose on the month.
If you focus your attention on global equities, all 10 sectors in the S&P 500, S&P Global 1200, S&P MidCap 400, and S&P SmallCap 600 posted declines during the month. That's enough to indicate that it was a pretty nasty November whether you were looking to equities in particular, or a variety of asset classes in general.
EQ: In early November, you discussed three main factors driving the market: Fear of a U.S. recession, a hard landing for China's economy, and the European Sovereign debt crisis. Two of the three concerns have since improved, but could this mean more intensified market reactions to developments in Europe?
Stovall: Since China and the U.S. are doing better, uncertainty is emanating almost exclusively from Europe. We are now being held hostage to headlines, and investors are hoping for news out of Europe that will help to resolve this sovereign crisis. There is less and less of a concern of a recession in the U.S. now that we have had stronger industrial production, and retail sales with, most recently, Black Friday numbers coming out better than expected. So, I think only if we were dragged into recession by some external force could that occur. But organically, most investors think the U.S. will continue to expand, albeit at a half-speed recovery rate.
From the perspective of China, we still believe a soft landing will likely be engineered by their government, but of course that could change if we find that they, too, are adversely affected by the slowdown in Europe since China does export a lot of goods to Europe. Investors are still very much taking a wait-and-see attitude as it applies to Europe, and as a result, we'll probably remain rangebound, moving from the lower levels to the upper and back, very quickly and very sharply.
EQ: December is usually a good month for the market. Judging by historical performance, could a November dip actually be an encouraging sign for the market in this coming month?
Stovall: Absolutely. History indicates, but does not guarantee, that December could be a very, very good month. Whether you go back to 1990, 1970, or 1945, it is by far the best month of the year for the S&P 500. Going back to 1929, it missed out to July by only 1 basis point, with December averaging 1.48 percent versus the 1.49 percent for July. The average price change is about 2.5x as good in December as it is for all months of the year, and the market tends to rise 77 percent of the time since WWII.
Also, if December is preceded by a negative November, you could be encouraged because the S&P 500 rose an average of 1.7 percent in December and also advanced 77 percent of the time. Even if the decline was very deep, such as 5 percent or more, the S&P managed to eek out a gain of 0.5 percent and rose 73 percent of the time.
EQ: For investors looking ahead to 2012, what can they look for in December to help set the tone for the coming year?
Stovall: The Stock Trader's Almanac says, "If Santa Claus should fail to call, the bears will come to Broad and Wall," indicating that if we don't end with a Santa Claus rally, investors--if they did take some tax loss selling--are not willing to put the money back to equities toward the end of the year and are not feeling good about the coming 12-month period. So we could be setting ourselves up for an equity disappointment. Also, we're heading into a presidential election year and the market typically doesn't do as well in an election year as it does in the third year of a presidential cycle.
And, let's just face it, there's still an awful lot of concern about the health of the global economy because I believe this sovereign debt issue is not going to be resolved in a couple of months or even the coming calendar year.
EQ: You noted in your latest Sector Watch report that investors are facing unprecedented times and may be more skeptical than ever when looking at historical trends. With all the years you've been observing the market, where would you put this current market in terms volatility and market uncertainty?
Stovall: In terms of volatility, I would place it toward the top because since 1950, the number of times per year on average that the S&P 500 declined by 2 percent or more in a single day has been five times. Yet, since 2000, that average has been 15 times. We've had 3x the average amount of volatility in the last 11 years as we have had going back to 1950. So volatility certainly has been elevated in my opinion and will remain so as a result of high-frequency trading, inverted ETFs as well as leveraged ETFs.
Moreover, when people say "unprecedented times," well you know what? Almost any time is unprecedented if it’s going to shake the confidence of the stock market. When, since 1962, have we come within inches of nuclear Armageddon as we did during the Cuban missile crisis? When, since the 1970s, has OPEC embargoed oil being sent to the U.S.? When, since 1999, did investors think tech stocks were a bargain even though they were trading at 30x trailing operating results?
The triggers for bear markets are all relatively new, but what the market does during market declines and subsequent advances usually ends up being fairly similar. I wouldn't give up on history, just realize that it can be a very good guide, but never gospel.
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