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As Sam Sees It: What Has the Market So Jittery?

Volatility is here to stay. How should investors adapt?
Sam Stovall is Chief Investment Strategist of U.S. Equity Strategy at CFRA. He serves as analyst, publisher and communicator of S&P’s outlooks for the economy, market, and sectors. Sam is the Chairman of the S&P Investment Policy Committee, where he focuses on market history and valuations, as well as industry momentum strategies. He is the author of The Standard & Poor’s Guide to Sector Investing and The Seven Rules of Wall Street. In addition, Sam writes a weekly investment piece, featured on S&P Global Market Intelligence’s MarketScope Advisor platform and his work is also found in the flagship weekly newsletter The Outlook. Prior to joining S&P Global in 1989 and CFRA in 2016, Sam served as Editor In Chief at Argus Research, an independent investment research firm in New York City. He holds an MBA in Finance from New York University and a B.A. in History/Education from Muhlenberg College, in Allentown, PA. He is a CFP® certificant and is a Trustee of the Securities Industry Institute®, the executive development program held annually at The Wharton School of The University of Pennsylvania.
Sam Stovall is Chief Investment Strategist of U.S. Equity Strategy at CFRA. He serves as analyst, publisher and communicator of S&P’s outlooks for the economy, market, and sectors. Sam is the Chairman of the S&P Investment Policy Committee, where he focuses on market history and valuations, as well as industry momentum strategies. He is the author of The Standard & Poor’s Guide to Sector Investing and The Seven Rules of Wall Street. In addition, Sam writes a weekly investment piece, featured on S&P Global Market Intelligence’s MarketScope Advisor platform and his work is also found in the flagship weekly newsletter The Outlook. Prior to joining S&P Global in 1989 and CFRA in 2016, Sam served as Editor In Chief at Argus Research, an independent investment research firm in New York City. He holds an MBA in Finance from New York University and a B.A. in History/Education from Muhlenberg College, in Allentown, PA. He is a CFP® certificant and is a Trustee of the Securities Industry Institute®, the executive development program held annually at The Wharton School of The University of Pennsylvania.


Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.

EQ: New Fed Chair Jerome Powell testified in front of Congress this week, and his comments regarding the strengthening economy were interpreted by the market that a fourth rate hike is likelier than previously expected. What did you make of the Powell’s comments and the market’s immediate reaction—or possibly overreaction—to them?

Stovall: I didn’t think that he had said anything that was out of the ordinary. He really was simply repeating what the prior Fed Chair had been saying, that they’re going to continue to raise rates so long as the economy can support it. Because of the swift reaction to those comments, I think many on Wall Street thought there would be no rate increase in the March meeting, and now they’re thinking it’s back on the table. So, not only is a rate hike now likely in March, but yes, possibly there will be four for all of 2018.

EQ: In this week’s Sector Watch report, you noted that while volatility has seen a noticeable uptick in the early goings of 2018, it’s actually averaging out to be somewhat middle-of-the road historically. How does this current pace of volatility compare to the more extreme years?

Stovall: In this week’s report, I measured volatility in terms intraday price changes. By that, I mean the percent change between the intraday high and intraday low for each day within a full calendar year, and then taking the average. The average right now is 1.32% for the S&P 500, which is actually below the average for all years since 1962, which was at 1.43%.

Not surprisingly, the top 10 years with the highest amount of volatility were in such bear market years as 2008, 1974 and 1980. In fact, 2008 was the worst with an average intraday swing of 2.8%.

EQ: For the majority of this bull market, particularly the later stages of it, a significant catalyst has been that stocks were thought of as the only game in town. Considering that investors now have to price in this expected rise in volatility and with the rise interest rates, is this factor beginning to wane for bulls?

Stovall: Yes, I think it is. It’s making cash more attractive, because you’re not going to see cash go down. You can see bonds go down if we do end up having interest rates rise sharply higher. Stocks can go down because we’ve been in this bull market that is soon to celebrate its ninth year. Also, we’re starting to see some of the commodities improve, in particular, copper was just added to my Industry Momentum Portfolio. So, we’re starting to see some competition from the commodities as well around the globe.

EQ: For investors that would prefer not to have to stomach this type of market gyration, you offered a strategy to consider. Can you refresh our memory on the Henny Penny Portfolio, and what it emphasizes on?

Stovall: It basically gives nervous Nellie investors an opportunity to stick with stocks, but just moving to the less volatile issues. What the Henny Penny Portfolio does is it takes a simple 100% stock allocation—where you have 70% in US large-, mid-, and small-cap benchmarks combined with 30% in developed international and emerging market indices—and invests in their low volatility counterparts. Looking at the broad benchmarks, over the past 20 years, you got an 8.6% compound annual growth rate, a standard deviation of 18.6, and the portfolio went up 70% of the time.

If you simply took that 70/30 portfolio and substituted the low-volatility subsets for each one of these broad market benchmarks, you ended up with almost 200 basis points more per year in terms of a compound annual growth rate, while at the same time experiencing a 30% reduction in volatility, and you saw the portfolio rise 80% of the time. So, you were still able to stick with stocks but were also able to sleep better at night because of the low volatility aspect of the portfolio.

EQ: Does that mean investors should move away from the more cyclical sectors and get defensive here?

Stovall: I know that we are approaching the sell in May period, which means at the beginning of May, typically it’s better for investors to gravitate toward the more defensive areas of the market. But, March is actually a pretty good month for the market, ranking as the third-best performer since World War II. Furthermore, the second-best month is April.

So, I wouldn’t bail out of cyclical stocks just yet, because historically they tend to do fairly well in March and April. But moving into this May-through-October period, especially during mid-term election years, the market does tend to experience a lot of volatility, and on average has declined in each one of these quarters. So, investors certainly may want to think about gravitating toward the more defensive side of the equation, especially this year.

Many people think of position size in terms of how many shares they own of a particular stock. But it’s much smarter to think of it in terms of what percentage of your total capital is in a particular stock.