Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: While the broader market has not really experienced much volatility, there’s been quite a bit of sector rotation occurring in the market this past week, particular into Financials and out of Technology. Is this a sign that investors believe a tax deal is near?
Stovall: No, I don’t think that the tax deal is what’s causing Tech to be sold-off because, remember, Tech is among the two sectors in the S&P 500 that have the greatest international exposure. Since there is the possibility of a repatriation of foreign earnings, Tech would stand to benefit from that. I think what’s happening is simply that Tech has done so well investors are now saying its time to take profit from this group, and putting that into Financials.
The reasoning is because if we are likely to see a tax cut and also see better-than-expected domestic and global GDP growth, then maybe we will see the yield curve start to steepen once again, which will be very beneficial to diversified banks, in particular.
So, I think it has more to do with the prospect for the yield curve, combined with how well Tech has already done, that is causing this rotation.
EQ: As you pointed out in this week’s Sector Watch, 2017 has been a pretty remarkable year for the stock market. Just how good has these past 11 months been for stocks?
Stovall: The 11 months have been very good for the market. We’re up more than 16% through the latter part of November. Normally, we’re up less than 9%. At the same time, we’ve had an incredibly low level of volatility as defined by the count of days in which the S&P 500 has been up or down by 1% or more. This has happened 24 times since 1950 in which we’ve had above average all-time highs with below average volatility, and instead of stealing from Santa, it ends up providing a running start.
The market has gained an average of about 2% in December and has risen nearly 90% of the time. Both data points are better than your traditional December performance, which since 1945 has been up 1.7% and rose 76% of the time. While December has normally been a good month, the lack of volatility implies that we have a greater likelihood that it’ll be positive this time as well.
EQ: Like you said, December has traditionally been the best month for stocks. That said, some groups still tend to perform better than others during this time. Which groups should we be looking at?
Stovall: Well, I went back to 1990 and looked at those sectors and sub-industries that have been around all 28 years. Not surprisingly, it’s the cyclical Industrials and Financials that held up the best, or had the best batting average of beating the overall market. On the other hand, Energy and Tech were among the worst performers. In terms of sub-industries, Homebuilding, Metal & Glass Containers, and Broadcasting saw frequencies of outperformance in excess of 75%, whereas the General Merchandise Stores, Department Stores, and Specialty Stores—essentially, retailers in December—you traditionally don’t want to buy into them ahead of Christmas. That decision should have been made several months before. The retailers tend to outperform the market fewer than one out of every three years.
EQ: In our previous interviews we’ve discussed that there’s not necessarily any reason to think a bear market is on the horizon. However, as you’ve said in the past, bull markets typically go out with a bang. Could this kind of outperformance be considered a bang?
Stovall: Well, I guess that it could be considered a bang from a performance perspective, but I think that the broad group of individual investors are not sounding overly positive like the way they did at, let’s say, at the end of the tech bubble in which people were basically saying, “Let me cash in my muni bond funds in order to buy internet stocks.”
So, I think we still need to go into a FOMO (fear of missing out) mindset, which I don’t think has happened just yet, especially anecdotally, when you read about worries that are likely to pop up on the financial press or hear it on financial radio or see it on financial TV. If it bleeds, it leads, and right now, worries about the market continue to lead.
EQ: That FOMO mindset might apply to the cryptocurrency space and Bitcoin, particularly as it’s eclipsed the $11,000 market shortly after passing $10,000 the day before. What are your thoughts on the frothiness there?
Stovall: Well, if what is happening in Bitcoin was also happening to the rest of the market, then I would say that by all means we are now in a FOMO-mindset, and would want to be very fearful of it. Take a look at Bitcoin’s chart and you’ll see that it has gone parabolic, and nothing remains in that kind of trajectory forever. There is a limited supply of Bitcoin out there, so it’s supply and demand, and right now I think it’s basically a gambler’s haven. At the same time, I don’t think that a substantial decline in Bitcoin will have any material impact on the economy or on the stock market because it really just is not a mainstay of our overall economy.
It would probably account for an interesting headline, but will probably not affect anybody’s bottom line. That said, I guess we have to be careful that we don’t have a repeat of Long-Term Capital Management as we did back in September 1998. Hopefully, we will not find some hedge funds or what have you that have loaded up on Bitcoin at the worst possible time, only to be taken down when this asset does go through its digestive corrective phase.
EQ: In that sense, would a Bitcoin downturn be comparable somewhat to the dot com bubble in which the bubble and subsequent crash was mostly limited to the specific group, as opposed to a more systemic risk to the broader economy?
Stovall: Well, Technology did represent 33% of the S&P 500 at one point. Bitcoin represents nothing of the S&P 500 right now. So, I don’t see a decline in Bitcoin replicating a decline in Technology and its spillover effect into our stock market or economy. I think that, if you want to put a chart of Bitcoin on top of a chart of internet stocks in the early 2000s or on homebuilders back in the mid-2000s, you might end up seeing some very similar patterns, but I don’t think the fallout would be the same because you’re not looking at a sector that represents one-third of the entire S&P 500.
