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: Conventional wisdom says that what goes up must come down, so it’s no surprise that after the market’s current run, there are an increasingly number of financial pundits and experts saying that the market is overbought and due for at least a pullback in the near future. Is this market due to come down?
Stovall: I think pullbacks and corrections are part of every investor’s life, and they really should not learn to fear them, but just learn to deal with them. There have been 56 declines of 5 to 10 percent since World War II, and 19 declines of 10 to 20 percent during that time. Basically, we have had a decline of anywhere from 5 percent to 20 percent on average every year since World War II. My feeling is that we probably are due for some digestion of gains, but I think there are a lot of people who are left on the sidelines when this market rally started and they would love to get in on what’s left of it. I think this market could end up challenging the all-time high at 1565, but I’m not necessarily sure it will break through on the first attempt. Usually, these resistance levels of prior highs end up acting like a rusty door where it takes several attempts before it finally breaks open. So maybe we start to see a decline in the market take place the closer we get to that 1565 level. If it starts sooner, it might be a little early in my opinion, but who am I to say that it can’t happen?
EQ: Despite February’s historic trend of being one of the underperforming months, you found that certain cyclical sectors have performed quite well during this time in the past. Which sectors were they? What are some reasons for this?
Stovall: Basically, I first learned about the adage “As goes January, so goes the year…” from The Stock Trader’s Almanac, which says that traditionally if the market is up in January, it has continued to rise in the remaining 11 months of the year more than 80 percent of the time. That’s pretty impressive. At the same time, I found that whenever the market is lower in January, the rest of the year’s results were also not very good. So it was pretty consistent. I think investors are like dieters where they look at January as a new beginning. Therefore, if the market is up in January, it gives you an idea of what their mindset is for the remainder of the year. During the month of January, all 10 sectors were in positive territory as of Jan. 25, and the best performing sectors were Energy, Health Care, and Consumer Discretionary. While the market was up a little more than 5 percent, each of these sectors was up more than 7 percent. In terms of the industries that were the strongest performers, the five were Health Care Facilities (hospitals) up 20 percent, Specialized Consumer Services (consumer-oriented businesses) up 20 percent, Office Electronics was up 16 percent, Internet Retail up 16 percent, and Investment Banking and Brokerage up 14.5 percent. So there was some pretty good representation and actually 96 percent of the sub-industries for the S&P 500 were up on a month-to-date basis.
EQ: Is the market’s run even more impressive when factoring in Apple’s price collapse and the influence its stock has on the S&P 500 and other indices?
Stovall: Apple (AAPL), at it’s peak, represented close to 5 percent of the market value of the S&P 500. Along with the three other largest Technology companies were among the top five of all companies and represented more than the market value of 200 other companies in the S&P 500. So here we have four companies that are larger than 200 of the bottom companies in the 500. So whatever happens to Apple would have an impact on the market. Apple has been slipping a bit over the last couple of months, and what’s interesting is that despite Apple’s decline, the S&P 500 has continued to rise, which indicates to me that there is a growing and widening amount of interest by investors in getting into equities. So despite the decline of one security—Apple—it seems to be dissipated by the strength that is found in the other companies, industries, and sectors within the 500. So that makes me feel encouraged that this rally could continue.
EQ: What are your thoughts on the GDP numbers for Q4 and the possible implications it may have for policymakers and investors?
Stovall: I think people were a bit surprised. We thought we would see a 1 percent gain in GDP in the fourth quarter, which would have been down from the 3 percent from the prior quarter. However, it actually came in at -0.1 percent. I think when you peel away the outer leaves of this artichoke, if you will, that the core still looks pretty good. By that, I mean that there was softness that had a lot to do with Superstorm Sandy. Also, a lot of it had to do with businesses, consumers, and even the government sitting on their hands as they awaited the election and the results of the fiscal cliff. We also had a drain on inventories, implying that companies were actually selling and dipping into inventories to satisfy demand. So I would tend to say that the numbers are likely to be revised higher, and I think it sets us up for a nice first quarter 2013 result that could end up being a pleasant surprise to investors.