Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: The Dow finally crossed 20,000 on Wednesday and the S&P 500 is knocking on the door of 2300. Will this serve as a reinforced rusty door or serve as a tractor beam for the market?
Stovall: I think that we’ve already gone through the rusty-door phase and that’s what stopped the Dow from breaking above the 20,000 level back in early January. I think that with the S&P 500 now approaching the 2300 level, it’s really going to be dragged higher by the enthusiasm associated with the Dow finally closing above 20,000. So I think right now the wind is at the market’s back and investors will be smiling, at least for a while.
EQ: In this week’s Sector Watch, you looked back at the market’s performance under President Obama’s administration, which coincided with the second-longest bull market in history. What were some of the key positives and negatives during his eight years in office?
Stovall: Well, the interesting thing is President Obama ended up having the second-best cumulative performance of any eight-year president going back to Harry Truman. Very strong price performance overall. If you look at price performance on a compound annual growth rate, because you have some presidents that were only around for three years, some for four and some around for six, we found that President Obama slipped to number three with a 12% CAGR behind President Clinton’s 14.9%, and surprisingly behind President Ford’s 18.6% gain. But let’s face it, he was in office only about three years and was really only riding the upward wave of the new bull market following the 1973-74 crushing decline.
EQ: It wasn’t all positives. You noted that despite market performance being among the highest for presidents, GDP growth actually came in among the lowest.
Stovall: That’s right. The economy did not slip into recession, as was the case for other Democratic presidents such as Kennedy, Johnson and Clinton. Yet, every Republican president since 1900 experienced a recession in their first terms in office. But President Obama can’t brag about how well the economy did even though it didn’t slip into recession. Since 1949, the CAGR for real GDP was the lowest under President Obama, up 1.7%, as compared with the strongest performance, which was for President Truman, coming out of World War II at 5.6%
Other things that were of concern include the S&P 500 almost falling into a bear market, down 19.4%, in 2011. One of the reasons was the US lost its AAA credit rating, and we also had the worries about the breakup of the European Union. So there certainly were some negatives to go along with these positives.
EQ: From a sector standpoint, which groups and sub-industries performed best during this period? Which performed worst?
Stovall: First off, you could say everybody looked good because everybody was in positive territory. Of the 11 sectors in the S&P 1500, which consists of our large-cap 500, mid-cap 400 and small-cap 600, only three of them—Utilities, Telecom and Energy—posted a cumulative advance of less than 100%, where as the strongest advances came from Consumer Discretionary, up 285%, and Information Technology, up 251%. So very strong performances for the two cyclical sectors but relatively weak results for some of the more defensive areas.
Small caps were up 212% and mid caps were up 208%, versus the large caps’ 148%. You also had about 75% of the sub-industries in positive territory. One in particular, Internet and Direct Marketing Retail (no surprise), was up more than 1400% whereas the worst by far was Coal and Consumable Fuels, which was down 74%. Ouch.
EQ: The current bull market didn’t end with President Obama’s administration. With President Trump now in office, we’ve already started to see the beginnings of some real policy changes come out of the Oval Office. In many ways, this will alter the economic environment and market dynamics. Some strategists have speculated that we could be entering a new bull market as a result. Is it possible for a new bull market, with its own distinct characteristics, be born without the existing one dying?
Stovall: No, I don’t think you could call it a new bull market. I think you could describe it as the second leg of a two-legged bull market, however. Or you could say it’s the third or fourth leg, depending on how you want to break it up. But bull markets start from a 20% advance off of the bear-market bottom, and end with a 20% decline from a bull-market top. Period.
So there’s also no textbook definition of a bull and bear market, but that’s at least what I go by. So if this bull market has not ended, we cannot have a new one, but we certainly could have a leg of a bull market that is embracing new characteristics.