MARKET SNAPSHOT: The Stock Market's Historically Worst 2 Months Are Dead Ahead. Time To Worry?
August 05 2017 - 7:34AM
Dow Jones News
By Sue Chang, MarketWatch
Yardeni: 'The path of least resistance is still higher for
stocks'
August and September have had dismal records for stock returns
over the past 20 years and with strategists warning that the market
is overdue for a major correction
(http://www.marketwatch.com/story/3-reasons-a-stock-market-correction-is-coming-in-late-summer-or-early-fall-2017-08-03),
the next two months could be rough. But there are reasons to
believe that any impending selloff may not be as cataclysmic as
some fear.
Bank of America Merrill Lynch's technical research analyst
Stephen Suttmeier pointed out that there are some very important
factors that suggest that the market's upward trajectory remains
very much intact despite the track record working against it.
"First half 2017 was above average and this bodes well for
second half 2017 and the data for all periods, secular bull market
years, and Presidential Cycle Year 1 suggest that the S&P 500
could end the year in the 2,550-2,640 range," said Suttmeier in a
report.
In fact, during the early part of the presidential cycle, if
stocks perform better than average in the first six months, the
index rises 75% of the time in the second half with an average
return of 5.38%, he said.
The S&P 500 rose 8.2% from January to June and finished July
1.9% higher.
Subdued volatility in the market is another reason to be
optimistic. Suttmeier notes that the CBOE Volatility Index , Wall
Street's so-called fear index, is trading at record lows.
"The CBOE Volatility Index remains low and near 10 after hitting
a record intra-day low of 8.84 on July 26. Data back to 1990
suggest that VIX is typically closer [to] 20 plus when the S&P
500 starts a correction of 5%, 10%, or 20%," the analyst said.
Things are looking fairly solid from a technical perspective as
well. The NYSE advance/decline line -- which tracks the number of
advancing stocks minus the declining shares each day and adds that
to the figure from the previous session -- is at fresh highs,
pointing to a limited downside even if the market turns south.
But the best case for the S&P 500's uptrend may be the
following chart in which Suttmeier illustrates how the current bull
market is tracing a similar path as the rallies of 1980 and
1950.
"We believe that 2017 is the year of acceptance for the secular
bull trend that began on the April 2013 upside breakout. The prior
bull market breakouts from 1950 and 1980 lasted 15-20 years, which
suggests that current secular bull market may have a decade or more
to run," he said.
A soft U.S. dollar is also a boon for the market as a weak
currency makes exports more price-competitive.
Emmanuel Cau, an equity research analyst at J.P. Morgan
Cazenove, expects foreign exchange to further bolster earnings in
the second half, citing the euro's strength against the dollar for
the outperformance in U.S. sales versus Europe.
The euro has rallied 18% against the dollar this year, according
to FactSet.
David Kostin, chief U.S. strategist at Goldman Sachs, likewise
believes the dollar's steep drop helped to boost S&P 500
companies' results given that one-third of their revenues are
generated overseas. Kostin estimates that each 10% decline in the
U.S. dollar has the impact of adding roughly $3 to S&P 500's
earnings per share.
The greenback, as measured by the U.S. Dollar Index , is down
8.5% since the beginning of the year.
Meanwhile, corporate earnings continue to be supportive of
stocks. As of Friday, with 84% of S&P 500 companies having
released second-quarter results, 72% have reported better than
expected earnings and 70% have beat sales estimates, according to
FactSet.
"For now, the path of least resistance is still higher for
stocks, especially since forward earnings continue to blaze that
trail," said Ed Yardeni, chief investment strategist at Yardeni
Research, in a note to investors.
"As strategists, we are aiming for 2,700 by the middle of next
year, a four-fold increase since March 2009. Assuming a forward
price-to-earnings of 18, we would need to see forward earnings
climb to $150 per share by the middle of next year, up about 7.4%
from the latest reading in late July. That's realistic, in our
estimation."
The Dow Jones Industrial Average closed at a record on Friday
after easily breaching 22,000 during the week while the S&P 500
also closed in positive territory. The tech-laden Nasdaq , however,
fell for a second week in a row.
(END) Dow Jones Newswires
August 05, 2017 08:19 ET (12:19 GMT)
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