Image via Choo Yut Shing Follow/Flickr CC
Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: It already seems like forever ago, but the Republican leadership pulled the ACHA vote on Friday. The market seemed to respond very favorably to the decision. With the healthcare issue off the table for now, the focus shifts to tax reform. How do you think that will impact the market going forward?
Stovall: I think the market prefers that the Trump administration focus on tax reform because that would actually be something that could help stimulate economic growth. The healthcare program was really just more of a quagmire that, I think, made investors sort of wonder why the Republicans decided to start with that early in their administration. But now that the focus is on tax reform, I think that’s allowed investors to breathe a sigh of relief.
EQ: The S&P 500 could be on pace to close down for the month of March. In this week’s Sector Watch, you looked at the prospects for April. How has the market performed historically during this month?
Stovall: Historically, April has been a very good month, but not many people are aware of that. They just remember the T.S. Eliot line, “April is the cruellest month”. Well, it’s not for investors. Since World War II, the S&P 500 has gained 1.4% on average, which is twice the average monthly gain for all 12 months of the year. In addition, the S&P 500 rose in nearly 70% of all Aprils since WWII versus the nearly 60% for all months. So, you have a higher percent change and a greater frequency of the market advancing, and at the same time, it’s in the lower half of those months based on overall volatility. April is also a pretty good month for small-cap stocks. Going back to 1979, small caps gained an average of 1.7% in April versus 1.0% for all months, and the frequency of advance was essentially the same.
EQ: Using history as a guide, which areas of the market would investors want to be in?
Stovall: Looking at quarterly performances since 1989, which is when S&P first introduced sectors, we find that the market did a little bit better in the second quarter versus the first quarter, gaining an average of 2.2% versus 1.7%. Also, all 11 sectors posted positive returns on average in the second quarter, whereas nine of the 11 were up in the first quarter.
Those areas that tended to perform the best was Energy, Financials and Health Care. Energy was up an average of 3.3% and rose in price two out of every three years. Financials were up 2.4%, also rising two out of every three years. Health Care was up 3.3% in the second quarter and up 70% of the time. So, all of the industries were in positive territory, but some groups did better than others.
EQ: This April certainly isn’t expected to be a quiet month, with the debt ceiling creeping into view, earnings around the corner and few other concerns looming. Could the sell in May period get a head start this year?
Stovall: Well, it’s anybody’s guess when the sell in May period will actually start. We had a 16% decline that started on April 23, 2010. We then had a 19.4% decline that started on April 29, 2011. So, sort of like the automobile manufacturers introducing new models earlier and earlier in the year, you might have investors decide to enter that sell in May period a little earlier than simply April 30.
There are an awful lot of headwinds out there for investors to have to worry about. In particular, investors have to worry about the continuation of interest rate increases, the revisiting of healthcare package, as well as tax reform, Brexit, and the debt ceiling. So, there’s an awful lot that investors have to contend with. But quite frankly, a lot of this has been around for a while, and therefore, more likely than not, have been factored into share prices.