‘Market is widening disconnect between Main Street and Wall Street:’ CFRA

Yahoo Finance’s Alexis Christoforous and Sam Stovall, Chief Investment Strategist at CFRA, discuss the latest market moves.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to bring in Sam Stovall now, chief investment strategist at CFRA, to talk to us more about the markets. And, Sam, Jared was just saying how, you know, it doesn’t seem like investors are caring too much about some of the real things that are happening right now in our economy. And just look at today, as an example, right? We had a bunch of economic data that points to an uneven recovery, I guess, at best. Weekly jobless claims, they rose less than expected, but still above 800,000.

We saw a pullback in spending, down for the first time in seven months. We saw new home sales down for the first time in five months. Why is this market rallying in the face of that disappointing economic news?

SAM STOVALL: Well, I think, as you had said, it really is looking across the valley. I think, when I got up this morning and I heard that the president was pushing back on the stimulus plan, I thought I would see red futures numbers. But, in fact, nope. They were green. And they pretty much rose for the majority of today. So I guess the market is basically widening the disconnect, if you will, between Main Street and Wall Street, where Main Street focuses on the economic data of today, whereas Wall Street looks toward tomorrow.

ALEXIS CHRISTOFOROUS: So as we do look toward tomorrow, what’s gonna be sort of the tailwind for this market, at least in Q1, as you see it, Sam?

SAM STOVALL: Well, the tailwind for Q1, I think, will end up being how well the virus vaccine distribution is going, whether we actually see additional vaccines entering into the marketplace. And that way, investors can be focusing on the second half, more so. Because right now we’re actually seeing a reduction in full-year GDP growth estimates, which were at 5 and 1/2%, but now we’re looking at 5.1%. We’ve seen easing of total 2021 EPS growth for the S&P 500, now just a shade above 20%. So I think that investors are anticipating that the second half, we’ll see an upward shift in forecasts. So basically, looking for a bump up in expectations as we move closer to the second half.

ALEXIS CHRISTOFOROUS: I want to talk more about the short term for a moment. Tomorrow, Christmas Eve, traditionally, the start of what we call the Santa Claus Rally on Wall Street. Is there any indication that that’s gonna continue this year? And will it bleed into another thing, we call on Wall Street, the January Barometer? Do you think we’re gonna see those things play out this year?

SAM STOVALL: I do. The Santa Claus Rally is basically the last five trading days of the one calendar year bleeding into the first two calendar– or trading days of the next year. And whenever that has been positive, the market was up 10% versus 9% for all observations since World War II. And the frequency of advance was about three out of every four years.

The first five days, as the “Stock Trader’s Almanac” says, is an early warning signal for the January Barometer, meaning as goes January, so goes the year. And whenever we have had a positive move in the first five days, instead of getting a 10% gain, we got a 12 and 1/2% advance for the S&P 500, with the frequency of advance rising to 82%. So, definitely, we get an early warning signal for the full year, it tends to carry through.

ALEXIS CHRISTOFOROUS: When you look at sectors that may shine in 2021 with a new administration in the White House, do you see leadership change in those sectors? I mean, we know that technology has been strong for quite some time. We saw the small caps do quite nicely this year. ESG stocks also putting in a great performance– a lot of those ESG ETFs just going gangbusters. Are these themes you see continuing into 2021?

SAM STOVALL: Oh, yes, I do. Because I think one of the worries that investors have is that if we are to see improved economic forecasts, then we’re also likely to see an increase in inflationary expectations and likely see the bond yield move back above 1%. So I think that the focus will be more on the value side that has been sort of missing the run of the last couple of years. We’ll probably see the industrials, the materials, on a sector level do better and can carry over into the value space as well as small caps. And even overseas, because our expectation is for a more than 5% reduction in the value of the US dollar next year in addition to a near 40% growth in earnings for developed international markets.

ALEXIS CHRISTOFOROUS: You mentioned the bond market. They’re expecting yields to rise a bit next year. Where do investors go who are chasing yield next year? Where do you see some of the opportunities, Sam?

SAM STOVALL: Well, I wouldn’t be looking for the fixed income area. I would be looking for equities. But I would go for those companies that have a proven track record of raising both earnings and dividends. I think investors have to change their mindset from being a trader to a landlord.

Look for those stocks that, like a tenant, has a good track record of paying their rent but also has no problem with increased rents every year, meaning that they increase their dividend payout. So look to the S&P dividend aristocrats, which are companies that have raised their dividends in a minimum of 25 consecutive years. And also look, then, for a payout ratio that is maybe 75% or less so that should there be a contraction in earnings, they still have the wherewithal to pay that dividend.

ALEXIS CHRISTOFOROUS: All right. Great insights, as always. Sam Stovall, chief investment strategist at CFRA. And thanks so much. And happy holidays to you. We’ll see you in the new year.

SAM STOVALL: Thanks, Alexis. You too.

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