​As Sam Sees It: What to Make of This Unseasonal Market Strength

Sam Stovall  |

Image via htmvalerio/Flickr CC

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

EQ: The S&P 500 notched a new all-time high this week, in a sense, bucking the seasonal trend of the weakest months of the year. What could this mean for the rest of the month, and potentially, the rest of the year?

Stovall: What’s encouraging is we have had a well-above average number of all-time highs at 32 through Sept. 12, versus an average of 15 per calendar year since 1945. Yet, at the same time, we have had an anemic number of 1%-plus volatility days. We’ve only had eight so far this year versus an average of 50 per year since World War II. We’ve also had 18 years in which we’ve had both an above average number of new highs and a below average amount of volatility. In all 18 years, the market was up for the full calendar year and was higher by more than 18% in price.

So, it’s encouraging for the entire year, but you bring up an interesting question. If the market is up in August and September, the two most challenging and treacherous months of the year for the S&P 500, what happens in the remaining three months of the year? Well, the answer is the market is up about 2% in the final three months of the year, and has risen in 13 of 16 observations. So, many more times than not, it ends up providing a running start for the rest of the year.

EQ: Speaking of the rest of the year and beyond, in this week’s Sector Watch report, you noted that the yield spread between dividends and bonds suggest the stock market could be looking at double digit gains in the next 12 months. What is this indicator telling you from a historical perspective?

Stovall: What it’s telling me is that there’s not a lot of attractive alternatives out there, in particular, the yield of the 10-year note. The average yield spread has been closer to about between 3-4%, whereas today, it’s only hovering at about 10 basis points. So, yes, the yield on the 10-year note is higher than the yield on the S&P 500. But since 1953, whenever the 10-year note exceed dividend yields by less than 1%, the market rose an average of 11% in the coming 12-month period and did so in three out of every four years. That’s obviously not a guarantee, but it’s simply an encouragement because the average price change plus frequency of advance is better than any given year.

EQ: Interest rates and bond yields, as they have been for many years, were expected to rise at least more meaningfully this year. Based on what you’re seeing in the markets, are investors not expecting this to occur in the near or foreseeable future?

Stovall: Well, the Federal Reserve has its next Open Market Committee meeting next week, and few people expect them to raise rates in September. However, we don’t rule out the possibility of another 25-basis point rate increase in the mid-December policy meeting. That’s because expectations are that both economic growth and inflation should start to pick up. If that is the case, then I think the Fed will take advantage of that opportunity to raise rates just one more time this year.

So, we’re not out of the rate-tightening cycle just yet, but I don’t see the Fed getting very aggressive.

EQ: With all this in mind, are there any particular sectors investors should lean toward more than others?

Stovall: We are approaching what’s called the Cyclical Six—those six months of the year between November through April of the following year in which the cyclical sectors tend to do best. We currently have overweight recommendations on Industrials and Materials, which are two economically sensitive sectors. We also favor the Health Care sector, which is traditionally defensive in nature. We also favor many of the sub-industries in the other cyclically sensitive areas of Consumer Discretionary and Industrials. So, in general, I think investors are likely to remain with growth because we are in the latter innings of this bull market, and investors probably feel they don’t have time to sit and wait for a value stock to turn around. Thus, I believe it’s the growthier issues and those that have already proven they have earnings increases thus far this year that are likely to remain the stalwarts.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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