Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: On Tuesday, President Trump threatened to shut down the government if his plans for a border wall is not funded. What kind of uncertainty and risk does this introduce into the market right now?
Stovall: I think it was intended to introduce uncertainty because I really think it’s Donald Trump the negotiator setting things off by indicating that he’s going to dig his heels in unless he gets what he wants. I think certainly that the Democrats, as well as many Republicans, are not going to be willing to give into each one of his demands, so he will probably end up compromising and come up with something that he feels is plausible to his voter base, but at the same time, will not end up shutting down the government.
EQ: What would be the market impact of a government shutdown, if it were to go that far?
Stovall: Well, if I’m wrong and he is willing to shut down the government to get what he wants, then I think the market would respond quite negatively because it would be a perfect opportunity for the Democrats to make the Republicans look bad since they would probably not get the votes required to pass this. In addition, it would then put the future legislation of tax reform and infrastructure spending into question, and as a result, the Trump Bump would end up dissolving.
EQ: Key central bankers are gathering at the Jackson Hole symposium, which kicks off on Thursday. Is this year’s gathering, and the news that may come from it, potentially more significant than in year’s past?
Stovall: No, I think actually it’s less significant. This is not 2008-09 all over again. I think that we’re probably going to be disappointed if we are hoping to get additional clarity from Fed Chair Janet Yellen or ECB President Mario Draghi. We’ve already read the minutes from the most recent FOMC meeting, and have already seen a lot of the Fed economic forecasts come through, either in print or spoken in presentations. Plus, the ECB has already said that Draghi will have nothing new to say at his Friday speech. So, I think investors are really going to regard this as a bit of a yawner and probably get nothing new out of it.
EQ: In this week’s Sector Watch, you pointed out that the momentum leaders of the S&P 500, particularly the cyclical groups, have started to become the laggards of the market. So, while the broader market is still within reach of its all-time highs, there’s certainly some gyration occurring underneath. Is this a buying opportunity or does this suggest a rotation may be underway?
Stovall: I think it suggests that there is a rotation occurring below the surface, meaning it’s occurring at the sub-industry level and not the market level. So, while we might end up having that elusive pullback of 5-10% occur in the near future, I don’t think it’s going to morph into a bear market because signs of recession are nowhere to be found. As a result, I think there could be some rotational opportunities available.
More specifically, looking at those sub-industries that were raised into the top 10% based on trailing 12-month price performance, you get sub-groups like Airlines, Managed Health Care, and Diversified Banks that are now in this top-performing momentum group, which in the prior period had not been there. So, I think we can see some future price gains coming from these groups that have entered the ranks of the strongest categories.
EQ: For investors that are in the groups that have fallen out of the top 10%, what should their next course of action be?
Stovall: Talking about the stocks specifically, in this week’s report I showed a list of those companies that represented the weakest index component, ranked either hold, sell or strong sell. If the stocks that you own are ranked sell or strong sell, well then CFRA equity analysts think there are better opportunities elsewhere and you’re better off selling these and moving on. For those with hold recommendations, the decision to make a move is your own, but by holding these issues, you are probably only going to keep pace with the market overall, and could end up going through a bit of a bumpy ride.