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If we are to see this decline bottom out fairly soon, it has a very good chance of occurring in October': CFRA Strategist

Sam Stovall, Chief Investment Strategist at CFRA, joins Yahoo Finance’s Akiko Fujita to discuss the latest market action amid the coronavirus pandemic.

Video Transcript

AKIKO FUJITA: Let's bring in Sam Stovall, our first guest for the hour. He is the Chief Investment Strategist at CFRA. Sam, it's great to have you on on this Friday, what has been a very choppy week.

Let's start with those durable goods numbers that we got out today. I guess the good news is the factory goods are continuing to go higher. The bad news is that we are starting to see the pace of that growth slowing down, which is what we were seeing reflected in so much of the economic data that's come out. What was your read on that number?

SAM STOVALL: Well, Akiko, my read is that, in the third quarter, we're expected to see about a 31% jump in real GDP, but then [INAUDIBLE] down to about a 6.5% advance in the fourth quarter. So I think what we're experiencing is the beginning of that slowdown portion, where basically we've seen most of the snapback take place early in the quarter. But now, with the likelihood of a ramp-up in COVID cases, the second wave, et cetera, that we could end up seeing the changes end up slowing down a bit.

AKIKO FUJITA: How much of that slowdown that we've seen over the last month or so do you attribute directly to the lack of progress on the stimulus bill?

SAM STOVALL: Well, I think the stimulus bill certainly has affected those on Main Street, and I think has put a damper on those on Wall Street. And, essentially, that was part of the reason that we ended up dipping into what is almost a correction, meaning almost a 10% decline on the closing basis for the S&P 500. I think, when all is said and done, it will be in the lower to mid teens that we will have to endure before this bull market starts to resume its pace once again.

AKIKO FUJITA: What do you attribute to the pullback now? How much of this is about the concerns around the uptick in coronavirus cases, the concerns around the election? How much of what we're seeing today is actually trading on fundamentals?

SAM STOVALL: Well, the fundamentals have been stretched for quite some time. Right now, we're trading at about a 40% premium to the average PE, based on forward 12-month earnings. And so that looks a bit stretched.

At the end of August, we were looking at the price differential between the growth and the value indices. That was highest in history, even higher than where we were at the end of the tech bubble. So, from the fundamental perspective, there was an awful lot of optimism built into these numbers looking across the valley, into 2021, for about a 27% GDP growth rate-- I'm sorry, earnings growth rate-- and about a 5 and 1/2% GDP growth rate. So analysts continue to be optimistic about the future. But I think it's time to put up or shut up.

AKIKO FUJITA: To the point you made earlier, you have been calling for anywhere from a 5% to 10% pullback. You look ahead to October. And you have noted rightly that historically October is kind of when things bottom out. Given where things are with the headlines right now and just how much uncertainty exists, can we use some of those-- those historic-- historic correlations to look ahead to October to say, well, this is likely where the market is going to pull back even further?

SAM STOVALL: I believe so. October's pattern is like a check mark. It comes in. It drops. But then, after bottoming, we end up closing the month higher than where we started.

The main factor that spooks investors is the volatility. The highest one-month performance occurred in October, going back to World War II. The lowest one-month performance occurred in October, since World War II. The standard deviation of returns was 30% higher than that for the average for all months.

And then, finally, the greatest percentage of pullback was 5% to 10% decline. Corrections and bear markets occurred in October. So it ends up being tagged as a capitulation month. So, if we are to see this decline bottom out fairly soon, it has a very good chance of occurring in October.

AKIKO FUJITA: So certainly not good news for investors who are looking ahead to say, well, where should I be positioning myself right now. What's your advice?

SAM STOVALL: Well, I think it's a little too early yet to say that we have full faith in the rotation into value, into small caps, into international, even though it is occurring on a short-term basis. I like to say that the old adage of fool me once, shame on you, fool me 10 times, shame on me-- because that's basically what's happened. There have been multiple occurrences in which value has started to peek its head above growth on a relative basis. But with interest rates being as low as they are and expectations being as high as they are, I think that growth, given the opportunity, will take the leadership once again.

AKIKO FUJITA: And, Sam, finally, there has been so much talk about what to expect around the election, not necessarily on Election Day as it is to how the results will come out. You've seen the headlines over the last few days with President Trump refusing to commit to this peaceful transfer of power. As it relates to the market risk, how do you think investors should be looking at that right now? And what kind of volatility are you anticipating around the election?

SAM STOVALL: Well, I think a lot of volatility heading up to the election. Many times, the market itself can give you a good idea as to who will be elected. A price rise from July 31 through October 31 has given you about an 82% frequency of indicating that the incumbent will be re-elected, whereas a price decline has pointed to an 88% likelihood of a replacement.

Once the election has taken place, investors, yes, are worried that, if we end up with a trifecta sweep across the board from the Democrats, that we could see a sell-off in November, which is possible because of the surprise of the sweep. That's happened five times since World War II when we've had Democrats take control of the White House as well as both houses of Congress. Yet the optimism of December tends to kick in once again. And, in the following year, the market was up an average of 10 and 1/2%.

AKIKO FUJITA: Yeah, some important historical context there, Sam. Great to talk to you on this Friday-- Sam Stovall, the Chief Investment Strategist at CFRA.