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 has continued to trade within a fairly narrow range since crossing the 2000 threshold last week. It’s only been a few trading days since with a long weekend in between, but what’s the mood of the market at right now?
Stovall: I think the mood of the market is one of uncertainty. The momentum of the market is certainly in the favor of the bulls as we’ve been able to sidestep those months that typically have ended up being landmines for investors in the past. As we head into September, the question is whether we can’t avoid it any longer.
Yet, on the other hand, for those people who follow sentiment indicators, a bearish group is pointing to Investors Intelligence Sentiment, which is saying there are too many bulls. However, Mark Hulbert's Stock Newsletter Sentiment Index says that there are too many bearish newsletter writers out there. So even when you’re dealing with sentiment indicators, it’s very hard to know who is correct.
EQ: August is usually viewed as one of the slowest months for the market because most people tend to go off on vacation. Is September the same? Or should we expect a rush of activity as investors and traders play some catchup?
Stovall: Historically, while August is slow and low, September is usually even worse. Next to February, it’s one of the only two out of 12 months that posted an average decline, with September’s average being the lowest of all months. At the same time, September is the only month that declines more frequently than it rises, falling 55% of the time since World War II. So history would imply that September could be a challenging month.
Yet, if you look to the performance of Septembers following up Julys and Augusts, we find that the market has gained an average of 1% as compared with its average decline of nearly 1%. So the deeper one tries to dig into historical precedent, the more confused one gets at this point. As a result, it’s probably safer for investors to be focusing more on valuations and a 12-month outlook than to a four-week outlook.
EQ: In this week’s Sector Watch report, you noted that the bulls can point to the S&P 500’s performance after a major handle, and the bears could point to September’s historic performance, as reasons for their cases. Usually when there’s no clear direction, opinionated voices just get louder. How should investors handle these types of bold calls in the coming month?
Stovall: There’s a good book that I like to recommend called The Intelligent Asset Allocator by William Bernstein. His advice to most investors is to diversify, rebalance, and ignore. Diversify among low-correlated assets, rebalance annually, and then ignore the fluctuations in your portfolio on a weekly, monthly, and even quarterly basis.
Also, ignore a lot of the noise that you tend to hear coming from financial television. This is mainly because everybody has their own opinion as to what is going to happen in the market, and everybody is trying to be a little different from everybody else, and as a result, what you end up with is hearing a cacophony of bulls and bears that confuse the average investor.
EQ: You also looked at sector valuations of the S&P 500 during these key thresholds, and it looks like the market currently is showing a bit more breadth than in the previous observations, correct?
Stovall: Yes. Right now, the S&P 500 is trading at about 17 times trailing operating earnings, which is the same level that it was trading at when it crossed the 1500 level and cheaper than the 22 P/E that it traded at when it crossed the 1000 threshold back in 1998.
If you actually go back to 1995, then the market was a little bit less expensive at 15 times trailing 12-month results. But today, even when you compare it with the levels of only 500 points ago, while the P/E on the S&P 500 is pretty much the same, we only have one sector today with a valuation above 20 in Consumer Discretionary at 21 times trailing 12-month operating earnings. Back in 2007 when the S&P 500 closed above 1500, we had five sectors that were trading above that 20% threshold.
When you’re dealing with three or four historical observations, it’s really not a lot to go on, but it can give you a little bit of optimism because in the 30 days following the surpassing of these 500-point thresholds, the S&P 500 was up about 5% as compared with investors who thought the market needs to take a rest after eclipsing these important thresholds.
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