As the month of May comes to a close, the S&P 500 managed to avoid what could have been one of the worst performing months in its history, but instead may have found potential near-term support after briefly breaking below 1300 on the index.
With June on the horizon, could investors expect another swoon in the market? Or will major develops both in the U.S. and overseas develop into catalysts for major swings one way or the other?
In this week’s interview with Sam Stovall, Chief Equity Strategist for S&P Capital IQ, we discussed major events to watch for next month, as well as how the strengthening dollar may affect the equities market.
EQ: Since hitting the low on May 18 of 1295 on the S&P 500, stocks have recovered nearly 3 percent based on yesterday’s close. Is this an encouraging sign that the market may at least have found a near-term bottom?
Stovall: Yes, the market may have already found a near-term bottom on May 18 when the S&P 500 had posted an accumulative 8.7-percent decline from the April 2-high. Also, if the 7.3-percent decline that we saw month-to-date for May 18 was a full-month number, it would have been worse than 96 percent of all single-month performances since 1945. So when you are looking at a two-standard deviation event, one would have to feel that there were very few other times in which this kind of environment has taken place. About 75 percent of those times in which we did have severe declines in a single month, they occurred after we had already experienced the 20-percent decline threshold, meaning we it occurred after we had already slipped into bear-market mode.
My feeling is that based on all the potential headwinds that are facing us, you could be encouraged that all we have experienced is an 8.7-percent decline rather than something worse. However, I believe that–similar to a referee watching for foot-faults in a tennis match–technicians are focusing on the S&P 500 retest of the May 18 intraday low of 1292. A close below that level would indicate that further declines are in the offing, yet a bounce would imply that the market believes Europeans will succeed in buying more time for Greece and Spain.
EQ: You noted in this week’s Sector Watch report that June has historically been the third-worst month for the market on average. How pivotal is the next month’s market performance for investors?
Stovall: It’s very important, though not necessarily from a pivotal perspective, but rather more from an accumulative perspective. A lot of events that will trigger what happens in the month of June could be regarded as pivotal. First off, we’re having the second round of Greek elections on June 17, and that will help to decide whether the new government is willing to go along with the previously approved austerity program or if it’s going to dig in its heals and decide it needs an easing of austerity measures. At the same time, there are minor elections that are going on in different districts around Europe.
At the end of June, the U.S. Supreme Court will rule on the insurance mandate of the 2010 Health Care Reform Act. So there are a lot of things that will be occurring in the month of June, but June itself is not historically a pivot month for the S&P 500. In fact, historically June has been a less-than-exciting month. Since World War II, the S&P 500 has declined 0.04 percent in the month of June, making it one of only four months of all 12 to post average declines. It has risen only 51 percent of the time, versus the average 67 percent frequency of advance. So the concern is that June could end up being a pretty dull month following a relatively volatile and scary time that we experienced in May.
EQ: Investors seem to be piling into the U.S. dollar as one of the only safe havens left right now. Is a stronger dollar a bad sign for stocks?
Stovall: Well, a stronger dollar doesn’t necessarily mean a bad time for stocks because it depends on what is driving it. If the U.S. economy was growing at an enviable pace and the rest of the world was also doing relatively well, then I would say that would be good for stock prices because the overall world is engaged in economic expansion. Yet, in this case, the reason why the dollar is doing well is because investors are seeking a safe haven since they don’t like what they see around the world. As a result, investors are piling into the U.S. dollar, which helps to push down the price of oil, gold, as well as other commodities, and in some ways, it also continues to inflate what might end up becoming a worrying bubble in the Treasury bond market.
EQ: The next two days has been labeled the “busiest 48 hours in the history of economic data.” Should investors and traders anticipate higher volatility because of this?
Stovall: Certainly from the U.S. perspective, I would tend to say that I would be more concerned if the payroll number on Friday ends up being the third of what is already two less-than-stellar pieces of information we have received in the past couple of days. They say that bad news comes in threes, but I’m hoping that doesn’t apply to economic data. What we saw recently was a continued downward trend for U.S. housing prices based on the S&P’s Case-Shiller Index. As of the most recent reading, U.S. home prices are now down more than 35 percent from the July 2006 peak. In addition, U.S. pending home sales fell 5.5 percent in April, and this slump erases the three straight increases that had been seen in pending home sales this year. So with payrolls coming out on Friday–expecting a gain of 150,000 new jobs and the unemployment rate remaining at 8.1 percent–let’s just hope that we don’t end up with another number that is similar to last month’s disappointing results. So while it might not end up being the busiest 48 hours in the history of economic data, it might end up being among the more discouraging series of economic days.