US equities will only get stronger from here and the strongest six months is yet to come, said Sam Stovall, Chief Equity Strategist at Standard & Poor’s. The seasonal period of November through April has outperformed May through October by a 7.0 percent versus 1.4 percent, respectively.
Also, the six-month period after mid-term elections gets even better with an average gain of more than 15 percent in the November through April period. So historically, the markets are entering this seasonally strong period, he noted.
Empirical data shows markets perform better when there’s a Republican Congress and a Democratic President and stocks have historically gained about 15.1 percent, beating out any other political scenario.
Asked to explain, Sam said data shows both the numbers are about the same, but they are different looks, meaning the November through April period is the 15 percent advance during all types of administration but after mid-term elections, and then for the full calendar year following mid-term elections. If there’s a Democratic President and a Republican Congress, the stock markets end up with a 15-percent advance on an average. No matter which way the data is sliced, the markets are expected to perform better in the coming six to 12 months, he explained.
Asked if the same pattern holds for small-cap stocks because the Russell 2000 index is up only about 2 percent year-to-date, Sam thinks small-cap stocks are possibly taking a breather now. Large cap stocks tend to better in a strengthening dollar environment because a lot of international investors are coming to US shores looking for better opportunities and they are going to look for more liquid, more well-known names in the Dow and S&P 500, not in the smaller cap indices. Also, even as the small caps declined in the S&P 600, the index is trading at a 30 percent premium to S&P 500 multiple; normally it trades at a 20 percent premium, he observed.
The plunge in oil prices is the biggest event in the markets right now with WTI Texas crude trading at about $76/barrel, which means gasoline is below $3/gallon for Americans. Asked if investors should be overweight in consumer discretionary stocks as this means more money in Americans’ pockets, Sam said he’s sticking with market-weight for consumer discretionary stocks.
Lower oil prices will help support the consumer discretionary group. However, the relative-strength chart of consumer discretionary versus S&P 500 shows a definite downtrend. A lot of investors are worried about retail spending in the coming holiday season and they are concerned about the margin pressure that the retailers have been experiencing.
The rule-of-thumb is that for every $10 decrease (per barrel) in the price of oil, it tends to add 20-25 basis points to real-GDP. There’s an offset; lower energy prices will help support consumer discretionary, but the technicals surely don’t look good, he concluded.
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