With Sam Stovall, Chief Investment Strategist of U.S. Equity Strategy at CFRA and author of The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market
Steve invited Sam Stovall, Chief Investment Strategist of U.S. Equity Strategy at CFRA and author of The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market, to stop by and talk about the current—and probable future—state of the stock market and the economy.
Some Economic Indicators And Interest Rates
Steve got the conversation started by noting the stock market’s recent performance, new high after new high but wondered about the possible implications of new, higher numbers in both the consumer and producer price index. Sam doesn’t find those more inflationary numbers particularly concerning, as they’re really just getting toward the 2% level that the Fed is aiming at. He also expects inflation to ease off going into the spring of 2020.
In response to Steve’s question about the slowdown in the industrial sector, Sam pointed out that only about 10% of the US economy is now manufacturing related. 90% is more services oriented. So, basically, industrial production numbers are not as important to the economy as they used to be.
On the subject of interest rate policy by the Fed, Sam expects a pause before the Fed makes another interest rate move. This is because the Fed doesn’t really see the effects of interest rate cuts or increases until about six to twelve months down the road. He doesn’t think they want to risk getting ahead of themselves, making too many cuts and then having to turn around and start raising rates to slow things down.
The Trade War With China And The Current State Of The Stock Market
Sam thinks that investor exuberance over thinking that a trade deal with China was basically a done deal is perhaps cooling off a bit as things remain somewhat uncertain. Investors concerned about the trade war with China may be a little reluctant to commit more capital to the market just now. Overall though, he’s still basically optimistic about the stock market and offered Steve some reasons why. Sam’s research uncovered the fact that for the 10 times since World War II when the market was up 20% or more for the year through the end of October, the S&P went up in November and December every time, with an average rise of 6%.
He also noted that, even though we’re in the 11th year of a bull market, that doesn’t necessarily mean the bull market’s about to end. Bull markets don’t just die of old age; they die from recession. Currently, the analysts at CFRA are projecting quarterly GDP growth of 2-2.5% through the end of 2020. Based on that analysis, a recession may yet be quite far down the road.
Stock Market Advice For 2020
Steve asked about the fact that while the market continues going higher, actual earnings and earnings projections are lower. That’s important because, in the same way that real estate is all about location, stock prices are, historically, all about earnings. But he kind of answered his own question by bringing up the market term, “Tina” (“There is no alternative”). In short, no matter what concerns investors may have about the stock market, it still looks more attractive right now than, say, buying 10-year Treasuries at 1.8%. Sam wholeheartedly agreed and pointed out that, since 1953, whenever the dividend yield on the S&P 500 has exceeded the yield on 10-year Treasuries, the stock market has gone higher by an average of 22% over the next 12 months.
Steve and Sam concluded their conversation by agreeing that, for the moment, investors shouldn’t be alarmed by articles predicting recession. They should, however, exercise reasonable caution, focus on quality investments, and not get overextended by buying on margin or recklessly speculating.
If you want to learn about Sam’s investing strategies, check out his book, The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: I am very happy to bring back a guest I’ve had on the show many times. His name is Sam Stovall. He’s the Chief Investment Strategist of US equity strategy at CFRA. He’s also an analyst and publisher in communication of S&P Outlook for the economy market and sectors. He’s the author of The Seven Rules of Wall Street and he’s been doing this for 35 years and to quote him, he talks about strategies for Nervous Nellies and considers himself a stock market storyteller combining history and current-day momentum to come up with an idea of what is actually going on. Sam, apologize for the long introduction, but I really want to welcome you back to the show.
Sam Stovall: Well, good to talk to you again, Steve.
Steve Pomeranz: So let’s get to the market which is your specialty. So, investors have had to contend with many conflicting issues of late that I want to discuss. And yet the market, over the last number of weeks, has been hitting multiple new highs. One of those negatives, I guess, that’s creating this conflict is that we’ve had stronger readings in consumer and producer price inflation. I haven’t heard those words in a long time. Stronger readings in inflation. What are the numbers?
Sam Stovall: Well, the numbers are really just creeping higher and getting to that 2% level that the Fed had been looking for and our belief is that, actually, when we start getting reads for November, December, January, that we could see inflation spiking a bit primarily because you have the weakness in commodity prices a year ago and also just a reduction in overall prices, but we think that will be temporary and that inflation will then ease off again as we move into the spring of 2020.
Steve Pomeranz: Yeah. Sometimes when you’re comparing year-over-year numbers, if for one reason the previous year’s numbers were weak, then you can get a pop and it looks like a higher than average pop, but it all regresses to the mean. But your prediction or feeling right now is that inflation is not necessarily a worry. Now we have seen weaker than predicted industrial production as well. So the industrial sector of the economy has been slowing down, right?
Sam Stovall: Yes, it has. Industrial production is the output of all factories, mines, and utilities in the United States and basically, it’s a supportive data point relative to the purchasing managers index or the ISM that reports on manufacturing within the US. But let me remind you also that only about 10% of the US economy is manufacturing related. 90% is more services oriented. So, yes, it is a disappointing number, but it has less of an effect on our economy than services does.
Steve Pomeranz: I know that when I started as an investment person, it was a very, very important number because obviously manufacturing accounted for a greater degree percentage of the US economy, but now it’s down to 10%. Also, the Fed has indicated that there’s a pause in their rate-cutting. Do you feel like this is it or—I don’t think we’re going to see an increase because I think they made that mistake, or they felt that was a mistake last year when they saw the effect of that. But do you think rates are going to continue to pause or do you think they’ll come down?
Sam Stovall: I think they’re going to pause, at least, for the next several months because basically, whenever they engage in a rate-reduction program, they’re not really going to see the fruits of their labor until six, 12 months down the road. So they don’t want to be cutting too many times only to then have to start to raise rates in order to slow things down. So, I think they also want to leave some interest rates, some arrows in their quiver, with which to fight the next recession because, let’s face it, with us being in the range of 1.5 percent to 1.75 percent, that’s not a lot in which to cut to try to stimulate the economy should we fall into recession.
Steve Pomeranz: Now, I know that Powell, the Fed chairman, and President Trump got together a few weeks ago and, of course, we don’t know what they were talking about. I know that President Trump has wanted him to significantly lower interest rates, but the election is coming up next year. So, you say there’s this lag time of six to nine months that’s going to hit right near the elections. So, that’s an interesting point of inquiry, to say the least. And then finally, what about the trade deal with China?
Sam Stovall: Well, I think that the market had been feeling pretty good and allowing itself to be convinced by tweets and commentaries that a deal essentially was done. And as a result, the S&P 500 recorded 10 new all-time highs since October 28th. But now that that phase one accord, it is coming into question and there is a possibility that it might be delayed until early 2020, I think investors are thinking, “Gee, maybe I should digest some of these recent gains and then wait till the smoke clears before I commit more capital.”
Steve Pomeranz: Yeah. You know, the S&P is up over 20% this year. So, how much more can we really expect going forward for at least a little while?
Sam Stovall: Well, actually let’s pretend you just asked that question rather than it being rhetorical.
Steve Pomeranz: Okay.
Sam Stovall: Because I did that research and what I found was that there were 10 times since World War II in which we had a 20% or more year-to-date performance through the end of October. In the November and December timeframe of those years, the S&P gained an average 6% and rose in price 10 of 10 times.
Steve Pomeranz: Oh, okay. Well, I’m going to stop being snarky and cynical because I guess there is room to go for us, which is good for all stockholders. That sounds like very good news. But it’s funny when you hear that the stock market has hit 10 new highs. If the S&P, which is, you know, 3000 and whatever, goes up a penny, it’s not really a penny, it’s a point, let’s say, or a fraction of a point, that’s a new high. So, also you’re building on a bigger base. So percentage-wise, new highs to get the percentage, you’ve got to have a pretty big movement point-wise for it to make any difference. So I just want to caution listeners that when you always hear about, “Oh, the market hit a new high,” while obviously, that’s good, that’s momentum, but it doesn’t really mean anything for your pocketbook. Would you agree or disagree with that?
Sam Stovall: I would agree with that because, yeah, if the S&P closes one point higher, that’s a new all-time high. The good thing is simply the old adage that the trend is your friend until it ends. But at the same time, there’s another adage that trees don’t grow to the sky.
Steve Pomeranz: Right, right. The trend is your friend till it ends. So, the problem is knowing when it’s going to end and then what … oh, that reminds me of the Warren Buffett quote that only when the tide goes out do you know who’s been swimming naked.
Sam Stovall: That is true.
Steve Pomeranz: So when it ends, you better have your clothes on and wash your underwear. Have clean underwear.
Sam Stovall: Exactly. Now we are, by some measures, in our 11th year of this bull market and investors worry that “Gee, well we have to roll over and die soon because we’re so old.” But actually, bull markets don’t die of old age. They die of fright. And what they’re most afraid of is recession. And even though every Republican president since Teddy Roosevelt has had a recession start in their first term in office, there’s no guarantee that that will happen this time. And our economists are projecting GDP growth anywhere from 2 to 2.5 percent in each of the quarters between now and the end of next year.
Steve Pomeranz: Yeah. Yeah. So it’s steady as she goes. Now I wonder whether an impeachment is going to have the psychological effect on the stock market. It doesn’t seem to have had any effect so far. I wonder if you did any numbers on that.
Sam Stovall: Well, yes, I did. We’ve only had one official impeachment. That was President Clinton back in the late 1990s. We had the threat of impeachment, which then caused President Richard Nixon to give up the presidency. So, you don’t have a lot of data points with which to make comparisons. But what I do find is that back in 1974, we were already a year and a half into the ’73, ’74 bear market that sliced off 50% of the S&P 500’s value.
Steve Pomeranz: Terrible, yeah, terrible, yeah.
Sam Stovall: And in 1998 we essentially had already gone through the Russian and Latin American debt crisis, were enduring the collapse of long-term capital management, and the S&P suffered a near 20% decline. But by the time the impeachment was handed to the Senate, the market was already on its way back to break even.
Steve Pomeranz: Okay. So, here’s the thing and a final point to discuss. The markets are rising and the momentum is higher and yet earnings, actual earnings coming in and projections going forward, are lower. So, usually, markets rise on good earnings. It’s all about … Real estate’s location, location, location, the stock market is earnings, earnings, earnings. And yet we’re seeing a divergence here and I’m wondering if it—here, I learned a new term when I was preparing for our talk. Have you heard of the term Tina? Do you know what-
Sam Stovall: Yes. There is no alternative.
Steve Pomeranz: There is no alternative. Tina. And basically, “where are you going to go?” is the question. You’re going to stick your money in 10-year treasuries at 1.8 something percent. It’s a little bit insane, right?
Sam Stovall: Exactly. So investors are saying, “Look, if I can get yields that are higher in the stock market and get growth potential, then I would rather be invested in equities.” Also, history bears this out going back to 1953. Whenever the dividend yield on the S&P 500 exceeded the yield on the 10-year note, the market was higher by an average of 22% 12 months later. It doesn’t happen all the time, but basically, it happened more times than not. And so, I think investors are saying, “You know, I’ll just stick with what’s working.”
Steve Pomeranz: You know, I think it also brings up the point that one shouldn’t make rash decisions based on a single statistic or some fearful article about, you know, how we have to have a recession. There are so many variables. It’s so impossible to know. Mostly just kind of make sure you stay invested by quality and don’t do dumb things like buy on margin and speculate and trade too much and all of that.
Sam Stovall: I agree with you 100%. I think there is so much information out there that most people, myself included, can be frozen by indecision. So I have now concluded that I can be so indecisive, my favorite color is plaid.
Steve Pomeranz: My guest is Sam Stovall, Chief Investment Strategist of US equity strategy at CFRA. Sam, once again, thank you so much for joining me.
Sam Stovall: My pleasure, Steven.
Steve Pomeranz: And folks, as you know, my mission is always to educate my listeners and I remind you week after week, segment after segment, that I love to get your questions. So please come to our website, which is stevepomeranz.com and while you’re there, sign up for our weekly update where you’ll get all of these segments that we do out with the ability to read them or to listen to them at your beck and call. Again, that’s stevepomeranz.com.