Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: Minutes of the Fed’s latest meeting were released Wednesday. While there weren’t any surprises, do you think investors’ recent heightened fears of inflation were assuaged by what they read?
Stovall: Well, I think that a lot of people got confirmation that the direction is still the same. The Fed expects their 2% target to be reached sometime this year, and they expect inflation to then drag up interest rates. However, I don’t really think that the report confirmed one way or the other whether we’re going to end up with two, three or even four rate hikes in 2018.
So, I think that it basically indicated that, yes, the economy continues to grow, the gradual rate-hike approach is still appropriate, and even some of the policymakers raised their forecasts since December, but in general, I don’t think it really added anything new, nor did it throw fuel onto the inflationary fire.
EQ: Looking at the market, stocks have continued their march higher after the recent sell-off. In this week’s Sector Watch, you looked at the speed in which the market has recouped losses since falling over 10% earlier this month. Which groups have led this bounce back?
Stovall: Not surprisingly, it’s the cyclical sectors. The ones that get beaten up quite a bit on the way down are the ones that lead on the way up. The best performer is Technology, which is followed closely by Financials. Then, leading the next tighter pack is Materials. The underperformers, not surprisingly, are the more defensive areas, such as Consumer Staples, Energy and Telecom Services. To a lesser extent, there’s also Real Estate and Utilities.
So, it’s really the cyclical sectors that have blasted forward coming out of the February 8th bottom.
EQ: You also noted that the market has endured more 1% volatility days in the first 8 weeks of this year than it did in all of 2017. What’s more, history suggests that we could see much more of this market behavior in 2018. How volatile could things get from here?
Stovall: What’s interesting is that the average number of days in one calendar year in which the market is up or down by 1% or more has been 50. We only experienced 8 such days in 2017, and history goes on to say that when we have had a year like 2017—where we had a below average number of volatility days and a well-above average number of new highs—in the subsequent year, we get back to a more normal volatility reading. So, that would imply that instead of the 1% days that we’ve had through the middle of February, we’re going to have five times that amount for all of 2018—about 50 of those days.
EQ: There are also what you call “double dippers,” that you discussed, in which the market experiences multiple pullbacks in one calendar year. Many investors have undoubtedly been waiting on a pullback or correction as an opportunity to buy low. With the understanding that there may be multiple meaningful dips, how should they adjust their strategies and market approach?
Stovall: I think what they have to do is put it in the back of their minds that this could be a volatile year—not simply in the count of 1% days, but also in the count of declines in excess of 5%. Going back to World War II, we’ve had 26 times in which the market experienced a decline in excess of 5% that then got back to break-even, and then fell into another one in that same calendar year. Meaning, we’ve had a minimum of two of these kinds of hair-raising declines. We’ve also had four times in which the market went through three such declines in one calendar year, and four more times in which we had four of them. So, I think what I’m trying to tell investors is, don’t let the increase in volatility of this market throw you off your course. We could indeed get back to break-even but then later experience another meaningful decline.
EQ: Last week marked the start of a new year on the Chinese Lunar Calendar. While 2018 is the Year of the Dog, from a market perspective, man’s best friend seems to be the Rooster (which was 2017). Where do Dog years rank among the 12 animals historically?
Stovall: Actually, it ranks in the middle-to-lower portion. Since 1900, the S&P 500 was up 6.2% on average and rose in price 56% of the time for the Year of the Dog. So, it’s good but not great. The Year of the Rooster in comparison, was up 12.4% on average and up about 70% of the time. The worst-performing animal by far is the Snake, declining 2.7% on average and only posting positive returns 40% of the time. For context, the average price change for all years since 1900 was 7.1% and the market rose essentially two out of every three years. So, the Dog is not the worst, but it’s not really anything worth bragging about, either.
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