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History Suggests Stock Rally Isn't Over

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Looking ahead, more optimistically-inclined strategists rattle off their reasons for cheer: interest rates are low, the Fed is accommodative and credit markets are open.

Here is another one: history might be on their side.

Sam Stovall, S&P’s chief investment strategist, notes that on November 4, the S&P 500 closed at 1221, recovering in four months all that was lost during the 16% price correction for the “500” that occurred between April 23 and July 2. The question many investors ask following a recovery is this: What happens after we get back to breakeven?

History suggests, says Stovall, that this market advance has further to run before succumbing to another meaningful decline. Specifically, since 1946, once corrections have run their course, the “500” continued to rise an additional 10%, on average, over 121 calendar days, before encountering another decline of 5% or more.

How long will this recovery run? The S&P crew believes it has a good chance of at least equaling the average of four months, due to favorable seasonals, still-strong forward EPS expectations and the prospects that the global economy will continue to recover at a gradually accelerating rate of pace.

So, should this post-recovery period be similar to the 17 since WWII, the S&P 500 has a good chance of recording an additional price increase of 10% beyond the 1221 closing price on November 4 in the coming four months. What’s more, during this recovery extension, the market will likely be led by the cyclical sectors in general, and Consumer Discretionary, Industrials and Tech, in particular. On the other hand, says Stovall, while a rising tide should lift all boats, the defensive
sectors in general, and the Consumer Staples, Telecom Services, and Utilities groups in particular, should be a bit less buoyant.

Of course, the strategist reminds us that all this stock market analysis comes with this critical caveat: history serves as guide, never gospel.
POSITION:  No positions in stocks mentioned.