The smart analysts at Convergex had a good summary of what the past week’s rally meant in the grand scheme of things. Let’s listen in to a verbatim (but lightly edited) excerpt:
— Stock markets are confirming what bond markets have known for weeks. Interest rates are staying lower for longer. The catalyst was the European Central Bank meeting in Malta on Thursday, where President Mario Draghi said, “The degree of monetary policy accommodation will need to be re-examined at our December policy meeting.” His message: We’ll think about doing more, not less.
— This should not have been all that surprising to U.S. investors, as Fed Funds futures markets don’t give a Fed rate increase a 50/50 shot until the March 16, 2016 meeting, close to six months away. Markets are saying there won’t be a surprise hike in December, but if there is it will be “one and done” or at least, “one, and then a nice long nap.”
— Many U.S. stocks may follow through for the rest of the quarter, but not all. The S&P 500 large-capitalization stocks were up 1.7% versus a 0.9% advance for the small cap Russell 2000. The former is now up for the year slightly while the latter is still 3.1% lower on the year. This suggests that if the ECB is going to loosen monetary policy, you want to be invested in companies that derive significant revenues from the eurozone. That’s a recipe for large-cap outperformance.
— The same observation seems to hold for industrials and materials. These companies are so beaten up over worries related to Chinese economic growth that they have to continue to work if this rally is to hold its momentum. And speaking of “momentum,” there is also a shift in investor attention away from the 52-week high list to the 52-week lows. “Momo” is a no-no, as the move in industrials and materials shows.
— The key rotation is out of health care and into energy. Yes, energy stocks have had a tough year but that has become its primary appeal late in 2015. Crude oil prices are holding, the group appears cheap, and on weeks like last week it draws real attention. With a 13.6% decline this year, the large-cap energy sector is unlikely to make it back to flat in 2015, but no other sector is down double-digits so this is clearly where investors are hunting for bargains.
— Enron harmed investor psychology, so beware of Valeant. The mere fact that Enron is back in the press and, fairly or not, associated with pharma company Valeant is significant for the entire market. When one high-profile company loses a large chunk of market value over its accounting, investors begin looking for other potential problems. They look inside the sector. They look at the auditor of the company in question to see what other clients they have. The whole thing becomes a bit of a witch hunt and takes on a life of its own.
— “Simple” businesses with clear corporate structures saw outsized gains. Bull markets are forgiving of complexity; choppier times call for simplicity. And even if U.S. stocks have further to run, it will be in more “plain vanilla” equity stories and fewer exotic flavors.
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So Much for History
You know we love a good historical statistic around here. They can look so persuasive, so valuable. Seasonal tendencies are incredibly seductive … until you get to a year like this one, when history has been thrown out the window.
Bespoke Investment Group analysts noted that 2015 had not one but two very positive historical patterns on its side: Years ending in five and the third year of a Presidential Election Cycle. Neither has helped to the degree seen in the past.
Since 1928, years ending in five have seen an average gain of 25.3%, with positive returns every year. Yet the S&P 500 is currently with almost 10 months on the books. Finishing with a loss would end an 80-year streak!
The good news is that 2015 is playing out similarly to 2005. Ten years ago, Bespoke notes, the S&P 500 was down 2.8% through the close on Oct. 20. Over the last two months of that year, the S&P 500 rallied 6.0% to finish the year 3.0% in the green. So there’s hope, if last week’s rally keeps up.
The second historical flop at this time: 2015 is the third year of the Presidential Election Cycle. Historically speaking, year three of the election cycle has historically been the best of the four. Going back to 1931, the S&P 500 has averaged a gain of 14.1% during these years with positive returns in each year, according to Bespoke.
Even more impressive is the fact that when the third year of an election cycle was also a year ending in five (every 20 years), the S&P 500 has been up a minimum of least 25%, the Bespoke data shows. From Oct. 20 through year end, the S&P 500 has seen a gain of 2.2% in those years with gains over 70% of the time, say the Bespoke analysts.
Last week was a step in the right direction for 2015 to get in synch with seasonal tendencies. But it’s still not a lock, so don’t get cocky.