Sam Stovall, the Chief Investment Strategist at CFRA and former Research Head at Standard & Poor’s, is a well-known figure in the financial services industry. His insights are valued by investors looking to follow macro signals and price trends across all asset classes. He joins the ETF Think Tank to offer his thoughts on everything from stocks and inflation to bitcoin and the Fed.
Stovall was relatively early in calling for a strong 2023 in risk assets and a healthy follow-up in 2024. He usually starts by looking at history and using past trends to position for the future. In this situation, he followed his belief that in a down year you traditionally want to buy losers because they often bounce back harder, positioning him in winners, including tech and communication services for 2023. Following up years in the market, you typically want to let your winners run. This type of positioning, he says, has traditionally worked in the past and did again over the past year and a half.
Regarding the current macro environment, Stovall agrees that inflation is on everybody’s mind. He has some concern around the stickiness of inflation, something which the recent CPI and PPI numbers have confirmed, and that’s likely to impact the Fed’s willingness to loosen policy in 2024. He’s still looking at three cuts this year but expects a “lower but slower” trend that likely continues well into 2025.
Stovall is encouraged by what he sees as a broadening out in equities. If the Fed needed to adjust policy expectations significantly, it would imply that recession is imminent. We’re not getting that message though, so investors may be buying in a little more to the idea that the economy is still in good shape. Among trends that Stovall sees in the markets right now: a majority of sub-industries are now trading above short- and long-term moving averages, while small-caps are very attractively valued, currently a 35% discount to their historical average P/E.
Some of Stovall’s thoughts on particular areas of the market:
He’s currently bullish on financials and tech, noting that both are beneficiaries of lower interest rates. People choose tech because that’s where the growth tends to be. If rates are headed lower with good earnings growth, then we can see tech continue to do well although it won’t be due to multiple expansion. The larger banks are better positioned than regionals. The overhang in the latter group needs to be removed before they can really power ahead. Investors may be waiting for the Fed to actually start cutting before moving into financials.
CFRA has a market weight recommendation on energy. He doesn’t think we’re heading into a global recession but does see prices heading higher. It’s a supply/demand scenario, but momentum is really working against it right now.
Many people feel healthcare is a good antidote to tech, but there’s a lot of tech within healthcare. It’s had some pushback thanks to the Inflation Reduction Act and there will be some drug pricing action in 2025, but people will continue to age and that’s a bullish catalyst.
Other key takeaways:
- 5% yields are really just the old normal coming back, but it is a reflection of the cost of higher debt loads. This is something we do need to address sooner rather than later and could help make international investments more attractive.
- What are some overlooked opportunities? Stovall likes to say “rotate, don’t retreat”. Like whitewater rafting, let the market take you where it wants to go. Seasonal rotation strategies could be advantageous – sticking to defense in the summer months and rotating to growth/cyclicals in the winter months.
- CFRA is currently overweight on communication services, consumer discretionary, tech and financials. They also favor small-caps for the long-term.
- Can we continue this obsession with past winners? The question is what we should do vs. what will we be doing. Small-caps are attractive, but Stovall thinks investors are waiting for a signal, such as rising above a moving average or achieving a measure of relative strength. If fear of missing out on a rebound takes hold, then small-caps could pick up steam.
- Stovall has trouble getting too excited about bitcoin because there’s no earnings, no dividends and no commercial value. He really thinks it’s geared towards speculators who are trying to get ahead of the curve. He doesn’t think bitcoin or blockchain will vanish, but he also just doesn’t know how to value it.
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