With markets near record highs, here’s where smart investors are putting their money.
Transcript:
CAROLINE WOODS: Joining me now is Sam Stovall, chief investment strategist at CFRA Research. Sam, Thanks so much for joining us.
SAM STOVALL: Happy to talk to you again, Caroline.
CAROLINE WOODS: So Sam, stocks are sort of searching for direction this morning, but sitting very close to all time highs. What’s your view on where the market currently is and where it goes from here?
SAM STOVALL: Well, I think the market currently is in sort of a pause zone right now. In many ways. The average investor probably feels like Dorothy, who has just given two different directions by the scarecrow as to where inflation is headed. We had the CPI, which indicated it was not much of a concern, but then the CPI came in hotter than expected and we will have the PCE sort help break that gridlock when it is released later this month. So I think with Jackson Hole coming up this week, we expect the Fed to pretty much tell us that they are still data dependent. They are going to be independent from outside influences, but I think they’re probably going to set the stage for a rate cut to be announced in September, and investors are betting on this rate cut next month.
CAROLINE WOODS: You think that’s realistic, and what do you think the market reaction will be if that happens, seeing as the S&P 500 is sitting at all time highs?
SAM STOVALL: Well, historically wanting is more profitable than having in the 12 months after the last rate hike and before the first rate cut, the S&P gained almost 18% on average going back to 1990. Yet in the 12 months after the first rate cut, the market gained less than 4%. This time around, it’s a little different. The market is up more than 13% doing quite nicely. Possibly because of the pause in terms of rate cuts and allowing investors to build up some excitement for when the next one will come along. So the real question is, is how much does the economy really need it, by how much will the employment picture be slowing and the unemployment rate be ticking higher. So, you know, the question is, will the lower rate cut help spur earnings, or is it really helping to cushion a potential recession.
CAROLINE WOODS: How much do you think the economy really needs it? Because we did see Bank of America research economists come out and say that they’re convinced the Fed won’t cut at all in 2025 due to stagflation. So how concerned are you about stagflation and what could that look like as it plays out in the markets?
SAM STOVALL: Well, stagflation is certainly a possibility, but we don’t think it is the most likely outcome. We’re still forecasting a 25 basis point cut in September, followed by a second in December, with the Fed taking a wait and see attitude at the October FOMC meeting while still forecasting about a 1.8% GDP growth in the third quarter. So a little bit of softness, but we’ll probably see an uptick in the next revision for the second quarter earnings. And then I think we will see about 2% earnings growth for the fourth quarter. So a little bit of softness but certainly not a recession. And I think we saw that earlier this year that bull markets don’t die of old age. They die of fright. And what they are most afraid of is recession. So with us realizing that we are not on the precipice of recession, that’s why we were able to recover all that we lost in only about three months. So this bull market sort of taking a wait and see approach.
CAROLINE WOODS: But where do you think it ultimately goes? Because I know historically September can be a pretty rough month for stocks. Are you concerned as we approach September, our seasonality hasn’t necessarily, you know, followed suit based on the whole “sell in May and go away” adage — didn’t really pay off this year.
SAM STOVALL: That’s right. Seasonality has certainly not been repealed. Sometimes we might not be as pronounced as it has been in other years, and September for the S&P 500 has been by far the worst month of the year, posting the deepest decline on average and falling more frequently than it has risen. It has risen only 44% of the time going back to World War II. So there is still a possibility. However, I would regard that more as a buying opportunity than I would as a reason to sell. So in a sense, you’re better off buying than bailing. Our year-end target is 6650 for the S&P 500, and that’s based on our 12-month target of 6850. So we still see upside potential even though it remains in the mid to slightly higher single digits over the coming period.
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