Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: The stock market got a jolt on Monday, falling into pullback territory and almost touching correction levels many had long anticipated. What caused the whipsaw action, which started Friday and accelerated on Monday?
Stovall: On Monday, we saw a lot of sell orders take place early because many investors put those in over the weekend. Once the market broke below its 50-day moving average as a result, it triggered a lot of sell-stop orders that exacerbated the sell-off. I think a lot of computerized algorithm sales, combined with inverse derivatives and whatnot, added to the speed with which the market sold off and the subsequent volatility.
EQ: Considering the nature of this drop—which has largely been attributed to mechanical anomalies in the market and volatility instruments—how concerned should investors be from here despite the health of the economy?
Stovall: I think that investors should be prepared for additional volatility, but I don’t think that they should worry about a new bear market because we believe that the economy remains healthy, and it’s actually expected to improve. In 2017, we saw a 2.3% rise in real GDP, and we think it will be a climb of 3.1% in 2018. In addition, we had earnings that were up about 10% in 2017, but now expect it to be more than 18% higher in 2018.
So, the economy and corporate profits are actually improving, not declining. With that, I would say that investors should simply look upon the news as information and sit on their hands to stop themselves from being their portfolios’ worst enemies by reacting from an emotional perspective.
EQ: While the market was able to rebound somewhat into green territory on Tuesday, the pullback isn’t necessarily finished. Wouldn’t it half to retake the recent high in order to officially be considered over?
Stovall: Right. I think because this happened so quickly, chances are that the conclusion will come more rapidly as will the recovery, but I don’t think we’re just going to see a sharp sell-off and then an immediate bounce. I think there has to be some backing and filling that has to take place before we can honestly say that this near-8% pullback has run its course.
EQ: In last week’s interview, we discussed the market’s historical performances after strong Januarys. Putting that into context of the market right now, could this be a compelling buying opportunity?
Stovall: Yes, absolutely. Since World War II, whenever the S&P 500 was up in January, it continued to rise about 85% of the time in the remaining 11 months of the year. Also, the average price change in those final months was a gain of more than 11%. As a result, that’s pretty good odds that the market will post a positive performance despite the negative start to February. So, I would say to use this as more of a buying opportunity than as a reason to bail.
EQ: In this week’s Sector Watch report, you identified several standout sectors investors may want to be overweight in for a January Barometer Portfolio. Which groups are these and how were they selected?
Stovall: The January Barometer itself I learned from The Stock Trader’s Almanac—published by my friends Yale and Jeff Hirsch—but I decided to take it one step further. I wanted to see how an investor would do if they purchased the three best performing sectors and the 10 best-performing sub-industries based on their January performances alone and held these groups for the coming 12-month period (end of January through end of January). History shows that they would’ve done exceptionally well, not only from an average price change basis but also from the frequency of beating the overall market.
The January Barometer Portfolio for 2018 through January 2019 is made up of the Consumer Discretionary, Health Care and Information Technology sectors, as well as a list of 10 sub-industries and the stocks that serve as proxies for sub-industries that were selected based upon CFRA equity analysts’ investment rankings.
