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Strong Sectors In A Bear Market

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Sam Stovall, Bear Market, Stock Market

With Sam Stovall, Managing Director of US Equity Strategy at CFRA Research; author of The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market

Steve spoke with Sam Stovall, Managing Director of US Equity Strategy at CFRA Research, about the current state of the stock market and whether he thinks the worst is behind us. Sam has been a market analyst for many years, so he’s seen his fair share of both bull and bear markets. Sam is also the author of the book, The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market.

Is The Worst Behind Us?

Steve started their conversation by observing that “The economy is still shut down, yet the stock market has rebounded and stabilized to a large degree.” He asked Sam if we’re really seeing a healthy rebound overall or if it’s just the top dozen or so large-cap stocks that have recovered.

Sam replied by saying, “Well, we are seeing a large number of companies that are moving above their 10-week moving average and also climbing above their 200-day moving average. While it does appear as if it’s the largest tech behemoths that are driving the market, I would tend to say that the breadth of the recovery is expanding, which is a positive for the overall market.”

Steve then stated that the market usually precedes a rise or fall in the economy by about seven months and asked Sam if he thinks that’s probably going to be the case again this time. Sam said he thinks the market’s March 23rd low is likely the bottom, noting that we’ve seen an impressive rally of about 30% since then. He thinks there’s less likelihood of a second major sell-off to a double bottom, primarily because of one key factor. “What’s happening today that did not happen in the past, like with the 2008 crash, is the very rapid stimulus response by the Federal Reserve.”

Steve also raised the question of whether the stimulus is really going into the economy or just into the stock market. Sam said that he disagrees with analysts who are saying the stimulus money is just creating liquidity in the market, noting that the largest stock market investors aren’t the people receiving stimulus checks.

He added that he thinks the market is at the point where it’s looking on down the road and considering where we’re likely to be six months to a year from now. Sam’s forecast from CFRA Research is “We expect to see 30% gains for the large caps next year, 40% for mid-caps, and 60% for small-cap stocks.”

Strong Sectors In A Bear Market

Since we’ve reached the month of May, Steve asked Sam about the old market adage, “Sell in May and go away” that has been reflected in the market’s performance since 1990, showing on average that the market has experienced its biggest gains—6.5%—between November and April, while only rising an average of 1.8% between May and October.

Sam offered listeners some deeper insight by adding that in two out of three years since 1990, the sectors of consumer staples and healthcare have significantly outperformed the overall market during that May to October period. He said, “I would rather stick with those defensive sectors where the demand for products and services remains fairly stable.” Steve asked if Sam would include major tech stocks, such as Microsoft and Apple, in that group of defensive stocks. Sam replied that he would include large, stable tech companies, noting that technology has typically been among the three top-performing sectors since 1990, the year that the S&P first started reporting sector-level data.

Steve summed up the conversation: “I think the message here is rotate, don’t retreat. If you’ve been out of the market because of fear, then it may be a good idea to look at getting back in, but play it defensively. The sectors Sam sees as strong, defensive sectors are healthcare, consumer staples, and blue-chip technology stocks. Investing in those sectors offers the added advantages that these are mostly companies whose names you know, that you’re familiar with, and they’re also companies that usually pay decent dividends.”

You can get more in-depth information on Sam Stovall’s view of the markets by visiting CFRAresearch.com.

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.

Read The Entire Transcript Here

Steve Pomeranz: I want to welcome Sam Stovall. He’s managing director of U.S. Equity Strategy at CFRA and a respected market technical analyst, he has been for decades. Welcome back to the show, Sam.

Sam Stovall: Good to talk to you, Steve.

Steve Pomeranz: The economy is still shut down and may be opening up cautiously, yet the stock market has rebounded and stabilized to a large degree. So looking at the statistics, is the rising market broad enough … First of all, when we say the market’s rising we’re talking about the S&P, these very broad indexes which are really controlled by, in a sense, a dozen stocks. Is the index itself showing a healthy rebound or is it just kind of the top companies that are doing that?

Sam Stovall: Well, we are seeing a large number of companies that are moving above their 10-week moving average, also slowly climbing above their 200-day moving average. While it does appear as if it’s the largest tech behemoths that are driving the market, I would tend to say that the breadth is looking as if it’s expanding, which is positive in total for the market.

Steve Pomeranz: The market usually precedes a rise or fall in the economy by about seven months, so you’ve written, do you think that it’s doing so this time?

Sam Stovall: I think it is. We are now up, meaning the S&P 500, through last night is higher by 30% from its March 23rd low. This is a very strong rally. Now, nervous Nellies would say, “Yeah, but we traditionally see 20-plus percent rallies in very deep bear markets.” We saw that in ’08, 2000, back in ’73, ’74, as well as ’29 and the late ’30s. So if this does end up being what I call a mega-meltdown bear market, then, yeah, this probably is a head fake.

However, what’s happening today that did not happen in the past is the very rapid stimulative response delivered by the Federal Reserve. They really have been leading the way in terms of monetary stimulus and Congress has grudgingly been able to work together to come out with at least two stimulus packages from a fiscal perspective. So what makes this different is the response by our leadership that could end up providing a very solid floor under that March 23rd low.

Steve Pomeranz: Yeah, there’s a couple of things about that. But I do have a question about that stimulus. The stimulus is made to go right into the economy, and yet some analysts have said that that stimulus goes into the liquidity, which then ends up in the stock market. How do those two work?

Sam Stovall: Well, I would disagree with that. Or disagree by saying that the liquidity just goes into the stock market because most of the people who are heavily invested in the stock market did not get stimulus checks. So, the checks are meant to go to those people who were most likely furloughed or just let go to give them some money that they can then turn around and spend in order to survive in the short term.

I think what is driving the stock market is the stock market’s natural tendency to look across the valley. To look and say, “Yeah, we know that the second quarter of 2020’s GDP is likely to drop by 30%, yet third-quarter should be up by nearly 20%, fourth quarter up by 10%, et cetera.” Yes, even though earnings within the S&P 500 are expected to be off 22% for all of 2020 and down 41% in the second quarter, we expect to see 30% gains for the large caps next year, 40% for mid-caps, and 60% for small caps. So, investors are basically saying, “This is going to be a kitchen sink year, where companies really just unload all of their expenses so they can look even more stellar in 2021.”

Steve Pomeranz: Does that suggest that the low we experienced on March 23rd, that wrenching, really hurtful low that we all saw and felt if we happened to look at our portfolios that day, that that is the bottom perhaps? Not that we shouldn’t necessarily expect, and I’m not saying guarantee, but just in terms of probabilities, a double bottom which everybody really fears. Because we experienced one of those in ’03 and in ’09, these wrenching double bottoms. You think we’re past that?

Sam Stovall: Yes. It does not mean that we don’t get some sort of consolidation of the recent gains, but I don’t think that we will end up going back to the prior low and exceeding that prior low. Sure, we could have some kind of news that causes investors to get nervous once again and elevates the agita, but I believe that because of the fiscal and monetary stimulus that has already been pumped in, that the March 23rd low will likely end up being the low for this bear market.

Steve Pomeranz: Okay. That’s very interesting. Now, there is this old Wall Street adage, “Sell in May and go away.” I never know if whether that was actually something you should ever do, but what about this year?

Sam Stovall: Well, I’m a big believer that you want to rotate, don’t retreat. Meaning, it’s better to stay then sell in May. What you do is, like whitewater rafting, you let the market take you where it traditionally wants to go. And in that May through October period, which since 1990 has been up only 1.8% on average, versus 6.5% in the November through April six-month period. While the market has posted that sub 2% growth rate May through October, the healthcare and consumer staples sectors have gained more than 4.5% on average, so about a 2.5% improvement over the market as a whole. So, on the firsthand, you want to stick with stocks because what if we don’t get a sharp sell-off? What if the March 23rd low was the low for this bear market? Then equities will likely move higher.

But it doesn’t mean that we should ignore this adage altogether. Because going back to 1990, looking at market sell-offs of about 20% or more, the average price change May through October of following those big sell-offs, the market was up about 6%, but consumer staples and healthcare were up more than 9%, with the average of those two sectors beating the market two out of every three years. The same is similar for presidential election years since 1990. That in that May through October period the market has gone down 2.4%, but staples and healthcare had been up an average of 2.5%, beating the market about six out of every 10 years.

Steve Pomeranz: So staples and healthcare, those are defensive stocks or defensive industries, right?

Sam Stovall: That’s correct. Which means that in a bear market they don’t go up, they just lose less than the overall market, and in a rising tide environment, it tends to lift all boats. In this May through October period, which I say tries to trace out the design on Charlie Brown’s shirt, meaning zigzag up and down, up and down, investors say, “You know what? I would rather stick with the defensive sectors where the demand for the products and services remains fairly static, than I am gravitating toward the really cyclical areas that tend to get beaten up.”

Steve Pomeranz:

Well, when you say defensive, are we also talking about these large technology stocks? Would you consider Microsoft or Apple or Google to be defensive?

Sam Stovall: I think some of these technology stocks are defensive. Believe it or not, going back to 1990, looking at the sectors within the S&P 500. And the reason I keep saying 1990 is because that’s when S&P first came out with its sector-level data. Technology has also been a very good performer. Its average price change has been among the top three, so if we were to select three sectors, it would be consumer staples, healthcare, and technology. So, yes, you can look to these larger, more stable tech companies, less the embryonic kind of tech companies that can serve as defensive in nature as well.

Steve Pomeranz: Well, we’re out of time, but I think the message here is rotate, don’t retreat. So if you’ve been out of the market because of fear, it may be a good idea to come back in the market but play it defensively. Which is kind of good because these are company names that you know, you’re familiar with. They usually pay decent dividends. And the statistics are behind you, pandemic not-withstanding.

Sam Stovall, managing director of U.S. Equity Strategy at CFRA. Thank you once again for joining me. Appreciate it.

Sam Stovall: My pleasure, Steve.