Why History Favors the Bulls

05/29/2012 11:00 am EST

Focus: MARKETS

Sam Stovall

Chief Investment Strategist, CFRA Research

There are several reasons why staying in the stock market may provide a pleasant surprise by year end, says Sam Stovall of S&P Capital IQ Equity Research, who explains further.

Does history tell us this is going to be a good year? Well, I’m here with Sam Stovall and he’s going to tell me what history tells us. Sam, is it going to be a good year?

I think it could be a surprisingly good year. The fact that the market was up in January and February is actually a pretty good omen, if you will, for the rest of the year.

Now, you might think why is that the case—it’s only two months of the year, and the market typically does rise in January. But it does not do very well in February. I think mainly because we’ve had strong advances in November, December, and January; the market takes a breather in February. So February is actually the second-worst month of the year for the S&P, behind September.

If January and February are higher…we’ve had that happen 25 times since WWII, and the total return for the full year has been positive 25 times. The average total return has been slightly in excess of 24%. Only twice, 1987 and 2011, was the total return less than 10%. Every other time it was in the teens or higher.

So who knows? There’s no guarantee that history will repeat itself, but if it does we probably will be surprised as to how well the year turns out, rather than how poorly.

I think as you noted you said 1987, which was one of the years where we had Black Monday…and even then by the end of the year you were looking at a positive market.

Exactly. We were up 5.5% in 1987, 2% in terms of price change and then 3.5% in terms of dividends reinvested, so a total return of 5.5%. If you had been on a year-long cruise and came back, you would have said hey not a bad year at all.

Who knows, this year certainly could be quite volatile. Last year, we had 21 times in which the S&P fell by 2% or more in a single day, as compared with the average 15 per year since 2000 and five per year since 1960. So volatility is certainly elevated, and it is certainly going to feel like a rollercoaster ride, rather than a simple merry-go-round.

But you said even last year it was above 10%, right?

Last year? No, 2011 was one of those two in which it was still positive, but it was up a shade more than 2%. So only two of these 25 posted total returns that were less than 10%. But the remainder of those, 23 were up more than 10%, and all of them together posted an average total return of 24%. So not bad.

Are there any particular sectors that might lead the charge that you see?

Well, we’re in a difficult period right now. We’re in that "sell in May and go away" period, so seasonal weakness is taking over right now.

But I think that should 2012 be one of those years where we do recover from this seasonal weakness, it is usually the defensive sectors that do well on the way down, but the cyclical sectors that tend to do well on the way up. Those that were beaten up the most during the decline are typically the ones that advance the most when we come out of the weak period.

I think one reason why the market might actually do relatively well this year is because in 2011, if you look to global markets, we experienced declines of about 25%. If you look to domestic mid- and small-cap stocks, we experienced declines of 25%. Only the S&P, the large-cap US benchmark was down less than 20% on a closing basis, a shade more than 21% on an intraday basis.

So technically, you could say we are in the first year of a brand-new bull market. Going back to WWII, whenever we’re coming off of severe corrections or mild bear markets, the S&P has gained 32% on average in that 12-month period, and none of those periods was down.

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