If you ask veteran market watcher Sam Stovall where he thinks the market is headed in the second half of the year, the chief equity strategist at S&P Capital IQ says what happened four months ago could be the biggest driver of where we end up six months from now.
At the crux of his call to stay long stocks in the face of a hyperactive, Fed-centric, uber-volatile marketplace, is one powerful factoid: every time since World War II that the S&P 500 (^GSPC) was up in January and February, the market has gone on to post a positive full-year return 26 of 26 times.
"And the average total return (under those circumstance) was about 24-percent," Stovall says in the attached video. "So with us up about 14-percent on a total return basis for the first half, if history repeats itself, we could be up another ten percent just to get to that average."
If he's right, that would land the S&P 500 at around 1,775 on New Year's eve.
Stovall says the recent volatility linked to comments by Ben Bernanke and the Fed is an overreaction. As he see it, despite a record short-term increase in 10-year Treasury yields (^TNX), "we are still in a very, very low rate environment which is typically good for equities."
From his standpoint, the greater threat to growth in the second half is fiscal, rather than monetary, as he says GDP is more susceptible to sequestration cuts than from interest rates getting back to normal.
As far as ways to position your investments for the next six months, Stovall favors two cyclical sectors and what he calls "the least defensive of the four defensive sectors."
Specifically, he has an overweight opinion on Consumer Discretionary (XLY) stocks for their solid earnings growth and the fact that they are predominantly exposed to the U.S. "A lot of people have been saying the U.S. is the best house on a bad block."
His second cyclical sector pick is the Financials (XLF), which he says are poised to deliver 11-percent earnings growth versus only about seven-percent for the market. Even so, he says they're cheaper on a PE-basis and will also benefit from a steeper yield curve as interest rates rise.
His defensive pick is Health Care (XLV), which he thinks has good momentum and an improving pipeline of new drugs.
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