EQ: The latest Fed minutes showed that a rate hike could be coming “fairly soon.” What do you think the likelihood is that we do actually see a hike in March?
Stovall: I think the likelihood is actually higher than what a lot of people are willing to give it because the Fed is probably beginning to feel that they’re behind the curve. With the markets now expecting that they’ll be raising rates a few times in 2017, combined with the prospects that US economic growth is getting strong, inflation trends are picking up, and the global economy is showing some signs of resiliency, I would tend to say that the Fed is increasingly likely to be raising rates when they meet in March, and then raise rates two, maybe three more times before the year is out.
EQ: While they didn’t mention President Trump by name, the Fed could be responding to anticipated policy changes here as it relates to the economy. Does this put more weight on what comes out of the administration from an investor’s perspective?
Stovall: Yes, I think it does. I think the Fed is basically listening to statements being made by the current Trump administration, and listening to the discussions in Congress, and just as investors are buying into equities in anticipation to tax cuts, infrastructure spending, and repatriation of foreign earnings, so too the Fed has to prepare their monetary policy in order to decide whether they are going to be raising rates in March or delaying it until June. I think the Fed basically listens and anticipates in a way similar to what investors do.
EQ: In this week’s Sector Watch report, you looked back at last year’s correction in the context of the current market’s uptrend. Does this rebound have more legs to run?
Stovall: Well, I actually think that if history were to repeat itself—and there’s no guarantee it will—it indicates that we are bumping up to the zone that traditionally causes the market to sort of stumble from exhaustion and head into another decline of 5% or more. We have advanced by more than 10% since July 11, 2016, which is when the market recouped from the previous correction. Historically, the market has gained 9.5% after breaking even from corrections. So with two thirds of the observations having stumbled after reaching a level that’s lower to where we are today, the probabilities point to the likelihood that we do end up digesting some gains starting in the near future.
EQ: You also noted that if the S&P 500 closes in the green for February, this could be a key bullish indicator for stocks in that the first two months of the year were positive for the market. Could that potentially extend the runway for this correction rebound?
Stovall: Not necessarily. I think it would not be extending the rebound, but what would happen is it would give investors reason to buy rather than bail should we go through the digestion of gains that could start very soon. But I think we need such a resetting of the dials. What it implies is that investors should not panic or lighten up on equities, but rather should be looking for a good re-entry point because chances are the market will then head higher as the year progresses. This indicator, specifically, shows that when the market is up in both January and February, it has risen 27 or 27 times for the entire calendar year, and has been up 25 of 27 times in the remaining 10 months of the year. The consistency is very high and the average full-year total return has been 24%. So it’s pretty encouraging from that perspective as well.
EQ: In other words, while we could end up higher at the end of the year, we’ll likely see some movement up and down in the meantime.
Stovall: Correct. I think that we are in an extremely low level of volatility that will probably not last. I think we do end up going through a digestion of gains, but that investors would be better off looking to buy some stocks that they feel that they missed out on because we will probably end the year higher than where we will be at the end of February.