Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
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EQ: After initially weathering the storm of the government shutdown, the market seems to be getting increasingly uneasy over Washington’s stalemate. Is the reality of the situation finally starting to set in for investors?
Stovall: I think what’s happening is that while a default is still not a probability, it is increasingly becoming a possibility. Investors are losing faith that our representatives will do the right thing. As a result, it’s causing investors to become unnerved by what will come out of Washington. So they’re looking to protect their gains so far this year by taking some money off the table.
EQ: We discussed last week that the S&P 500 gained over 10 percent after the previous shutdown ended in 1996. Looking at how far the S&P 500 has fallen since October 1, is this presenting a good buying opportunity for investors? Or is there still too much uncertainty to jump in right now?
Stovall: I think the further it goes, the more it does create a buying opportunity. We are still of the mindset that while we could go beyond the Oct. 17 deadline of the debt ceiling, we will not default on our debt and some sort of an agreement will be reached before we do eventually fall off of another one in successive cliffs that we have approached over the past year.
Our chief technician, Mark Arbeter, still thinks that the S&P 500 could fall between 8 and 13 percent, but we may get a short-term rally before we see the final push lower.
EQ: Does the potential of a more prolonged shutdown affect the Fed’s decision on when it will begin to taper?
Stovall: Yes, they’ve even told us that one of the reasons why they chose not to begin their tapering program in September was because of the concern of the impasse in Washington. The Fed does not want to add pressure to the markets currently, and realizes that having a couple more months of treasury purchases would not be such a bad thing.
In fact, if we do find that the government cannot agree on a debt ceiling, maybe the Fed will be the only purchaser of treasuries, and therefore, will be the only ones able to help out the government. The Fed can at least lend the U.S. government money while they try to figure out what to do with the debt ceiling.
EQ: For investors in need of some positive news, you discussed in this week’s Sector Watch that a good September usually translates to a promising fourth quarter. Can you tell us more about that?
Stovall: Knowing that September is the worst month of the year on average, and falls more often than it rises, I wanted to see what happens when the normal pattern is reversed and September is up? What does that say for the rest of the year? I found that it actually improves the possibility of an increase. Instead of getting an average 3.7 percent in the fourth quarter of the year, going back to World War II, the market was up 4.7 percent in the final quarter whenever we had a positive September.
Also, the frequency with which the quarter advanced rose to 80 percent from 76 percent of the time. Of course, with all the statistics that I share here, past performance is no guarantee of future results. But still, sometimes it can be encouraging.
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