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: As investors get ready to spend some time off with their loved ones and perhaps do a little shopping, the market will be entering the final stretch of the year. December is typically the best year for stocks. How good has December been for bulls?
Stovall: December has been surprisingly strong. If you go back to World War II, it has by far been the month in which the S&P 500 has posted its highest return as well as its highest frequency of advance. The S&P 500 has gained about 2.5 times the average in December as compared with all months of the year.
Furthermore, if you add the overlay of this being a mid-term election year, the average actually climbs a little bit from 1.8% to more than 2.1%. So it looks even better following a mid-term election.
EQ: Is volume typically lighter during December? If so, is there anything investors should be aware of when trading in a lighter market?
Stovall: Volume definitely tails off around the holidays. Whether it’s around Thanksgiving or whether it’s between Christmas and New Year’s, the trading volume is going to be anemic. So investors should be prepared for the potential of experiencing higher volatility as a result of the lower volume. However, I don’t think that should deter investors from feeling a bit optimistic about the market’s potential performance as we enter into the final month of the year.
EQ: You mentioned the mid-term election overlay, but in this week’s Sector Watch report, you looked at December’s performance following pullbacks as well as mid-term elections. Since we just endured both, what would history suggest about this coming December?
Stovall: The interesting thing is that if you have no overlays at all and just looked at the December performances since WWII, the average increase has been about 1.8%, and the market has risen 78% of the time. If you add the overlay of the mid-term elections, the average return increases to 2.1%, yet the frequency of advance slips a little bit to 76%.
If, however, you then consider that we just finished a decline of more than 5% (but not more than 10%), and wanted to see how the market does after enduring a pullback, the answer is it gains substantially less, up only 0.8% and the frequency of advance drops to 71%.
So in many ways, I think the conclusion is to be grateful for what you have in terms of the average performance, but adding more overlays reduces the number of observations and could risk skewing the results.
EQ: Last week, you warned investors that a repeat of the Polar Vortex could take its toll on the economy similar to the first quarter of this year. Are we seeing signs that this will be the case?
Stovall: I think that the Polar Vortex situation was really limited to snowfall around the Great Lakes. While the temperatures did dip around the country, they did not dip for very long. More importantly, they did not stop people from getting to work.
So unlike the first quarter of 2014, in which GDP declined by almost 3%, I think at worst the fallout from this most recent weather event will only be a hiccup. However, it does indicate that should we continue to have challenging weather as time goes on this winter, it could end up becoming a headwind. As we are speaking, the northeastern seaboard is going through a nor’easter and many of the offices and schools in the New York, Connecticut, and Massachusetts area have been shut down.
EQ: Following the grand jury decision in the Ferguson shooting case, there have been a number of protests popping up around the country. Could this be something that investors need to be keeping an eye on in case it spirals out of control?
Stovall: I don’t think they should worry about it from an investment perspective, because it will not likely lead to a global economic slowdown. Therefore, I don’t think it has any chance of adversely affecting equity prices.
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