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EQ: After crossing the 2300 level just a few weeks ago, the S&P 500 is now knocking on the door of 2400. What’s behind this big move in February?
Stovall: Well, what’s behind the move is the stock market likes what it hears coming from Washington in general, and from the White House in particular. The promises made by President Trump in increasing infrastructure spending, cutting taxes as well as removing regulatory constraints are certainly making those on Wall Street feel very optimistic. I still think there are an awful lot of disbelievers on the sidelines who are saying they can’t take it anymore and are now joining the party. It sort of sounds like what usually happens toward the end of a bear market, but in this case, I think investors are fearful of missing out.
EQ: Franklin Templeton is famous for saying bull markets die on euphoria. With investor sentiment now at its highest point since 1987, according to the most recent Investors Intelligence survey, should investors be worried that there are too many bulls in the market?
Stovall: I think that’s certainly a concern because, looking at all bull markets since World War II, whenever they’ve lasted three years or longer, they’ve traditionally gone out with a bang. I used to say that, as a result, we still have a long way to go in this bull market before we get to too elevated levels of euphoria. However, from March 9, 2016 through February 28 of this year, we’re up more than 20%. So, we’re right smack in the middle. Three of those bulls that went out with a bang had 12-month increases that were below where we are today, while three exceeded this bull market’s advance.
So, I would say that we are in the midst of a FOMO (fear of missing out) rally, and if you add to it the fact that the American Association of Individual Investors is also pointing to relatively elevated levels of equity market euphoria, it might not be the end right around the corner, but I think it is a cause for concern.
EQ: In this week’s Sector Watch, you looked at the recent market activity and noticed that defensive sectors seemed to be outperforming their cyclical counterparts. Could this indicate that investors are perhaps feeling a bit uneasy with how high the market has gone during this run?
Stovall: That is a possibility because the defensives have been beaten up so badly as investors have been trying to figure out if the Fed will be raising rates when they meet again in March. But looking at Wednesday’s trading, with the Dow up more than 300 points, we have essentially every sector except Utilities in positive territory. Utilities were off about 0.5%, yet everybody else was up from as little as 0.2% for Real Estate and as much as 3% for Financials. So, it seems as if the cyclical trade is still on with other strong areas being Materials and Industrials. I would tend to say investors right now are not looking for safe havens; they’re really looking for the passing lane.
EQ: You also noted that you do not believe this is a sign of a bigger rotation going on, and that CFRA is still leaning overweight for cyclicals and underweight defensive sectors. For those investors looking for a safe haven or to get a bit more defensive, what advice do you have?
Stovall: We do have buy recommendations for a variety of stocks. My feeling is to focus on companies that have had consistent track records raising earnings and dividends. I’m not the one who would be advising people to forget risk and go for low-quality stocks. I’m still pretty much an investor who looks for companies that grow earnings, and done so consistently for years, that therefore warrant the valuations that investors are paying today. Remember, just as quickly as markets can be moving higher, they can also change their minds and head lower, and it’s usually these lower quality stocks that tend to get beaten up the most.
