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As Sam Sees It: Can the Market Break Even Higher From Here?

Are stocks in nosebleed territory now or can they climb higher?
Sam Stovall is Chief Investment Strategist of U.S. Equity Strategy at CFRA. He serves as analyst, publisher and communicator of S&P’s outlooks for the economy, market, and sectors. Sam is the Chairman of the S&P Investment Policy Committee, where he focuses on market history and valuations, as well as industry momentum strategies. He is the author of The Standard & Poor’s Guide to Sector Investing and The Seven Rules of Wall Street. In addition, Sam writes a weekly investment piece, featured on S&P Global Market Intelligence’s MarketScope Advisor platform and his work is also found in the flagship weekly newsletter The Outlook. Prior to joining S&P Global in 1989 and CFRA in 2016, Sam served as Editor In Chief at Argus Research, an independent investment research firm in New York City. He holds an MBA in Finance from New York University and a B.A. in History/Education from Muhlenberg College, in Allentown, PA. He is a CFP® certificant and is a Trustee of the Securities Industry Institute®, the executive development program held annually at The Wharton School of The University of Pennsylvania.
Sam Stovall is Chief Investment Strategist of U.S. Equity Strategy at CFRA. He serves as analyst, publisher and communicator of S&P’s outlooks for the economy, market, and sectors. Sam is the Chairman of the S&P Investment Policy Committee, where he focuses on market history and valuations, as well as industry momentum strategies. He is the author of The Standard & Poor’s Guide to Sector Investing and The Seven Rules of Wall Street. In addition, Sam writes a weekly investment piece, featured on S&P Global Market Intelligence’s MarketScope Advisor platform and his work is also found in the flagship weekly newsletter The Outlook. Prior to joining S&P Global in 1989 and CFRA in 2016, Sam served as Editor In Chief at Argus Research, an independent investment research firm in New York City. He holds an MBA in Finance from New York University and a B.A. in History/Education from Muhlenberg College, in Allentown, PA. He is a CFP® certificant and is a Trustee of the Securities Industry Institute®, the executive development program held annually at The Wharton School of The University of Pennsylvania.

Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.

EQ: Earnings season has officially begun and it seems the Financial sector may have stumbled a bit to lead things off. While it’s definitely early, do you think this could have any potential impact on the rest of the quarter?

Stovall: No, I don’t because the banks actually met on the bottom line estimates. They were just challenged a bit on the top line estimates. We’ve found that instead of the 5.9% gain that had been anticipated pretty early in the second quarter earnings reporting period, now it seems we will be getting a 6.2% increase. Also, the estimate for Financials as a sector is for a 9.4% gain, versus the beginning of quarter estimate of 7.9%. Basically, what we are finding is that investors sold off some of their bank stocks because guidance was a bit weak, and also, the top line growth was not as expected. But from an earnings perspective, things are looking just fine.

EQ: The S&P 500 continues to break into new all-time highs, and 2,500 now seems to be within reach. What’s pushing stocks higher right now?

Stovall: I think what’s pushing stocks higher is several things. One is low inflation, and as a result, the likely delay of the Fed’s next rate-tightening program, and maybe even pushing it off into 2018 rather than some time in the fourth quarter of 2017. Also, earnings came in substantially better than expected in the first quarter, and I think investors are of the mindset that the same thing will happen in the second quarter. So instead of getting a 6% gain in earnings, we’ll probably get something between 9-10%.

And then it’s the story all over again of the lack of attractive alternatives. Investors have money on the sidelines, volatility has been very low, and so, it’s actually been increasing the risk that investors are willing to embrace.

EQ: In this week’s Sector Watch, you pointed out that investors may be getting a bit nervous with the string of new all-time highs the market has been notching this year. How do we stack up so far from a historical perspective, both in terms of this year and for this current bull market?

Stovall: Well, if we look at the 25 all-time highs that were set through July 14 this year, if that was a full-year number, it would rank 20th of most all-time highs in a year since World War II. So, that’s pretty far down the line. Yet, if you were to double that figure to sort of annualize that rate, you’re still looking at a count that just barely makes it into the top five. Also, looking at other ways of slicing and dicing it, July traditionally has been the second-best month for all-time highs with 10.3% coming in that month. November has been the best with 12.1% of all new highs coming in the month before Christmas. But when you look also at how the market has performed after reaching a new all-time high, while the average price change is pretty much the same as its been essentially during all three-, six- and 12-month periods, we have found that the frequency of additional moves higher increased. For instance, six months after hitting a new all-time high, the S&P 500 has gone higher yet 75% of the time. Meanwhile, the S&P 500 is up only 69% of the time over all six-month periods going back to World War II.

Finally, if you were to stack up all of these new highs for this bull market and compare them with other bull markets, it ranks number four in terms of the quantity of new highs, but also is in the top five when it comes to the percentage of all trading days that occur in new high territory. Again, believe it or not, the bull market of 1962-66 had 13% of its trading days in new all-time high territory. Even the bull market of 1990 to 2000 was just a shade below the 12.9%. Yet, this bull market has seen only 8.1% of trading days in new highs. What it implies, but obviously does not guarantee, is that we could probably see more all-time highs from here.

EQ: You mentioned that July is second only to November as the best months for new record highs. Of course, in between those two months are August and September, which actually rank as the worst and second worst in this area. What should investors make of that as we head deeper into the sell in May period?

Stovall: Well, we are coming into those two months that have had the worst price performance since WWII. August has seen an average decline of 0.2%, which is second worst only to September, which has seen an average decline of 0.7%. That compares with a gain of 0.7% for all months going back to 1945. If history is to repeat itself, and there’s no guarantee it will, then I think we’ll have to fasten our safety belts.

Another reason is the S&P 500 has fallen more times than it has risen in September, falling 58% of all observations. Yet, it was up more frequently than not in August, even though it did report an overall average decline. If history is a guide, it would say that we have been without a decline in prices for an extended period of time, and these coming two months are as good as any for that to occur.