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Stock Market Rally Ahead?

Written By Brian Hicks

Posted July 2, 2013

According to Sam Stovall, we could see the Standard & Poor 500 Index up around 1,775 at the end of this year.

Does that seem too ridiculous? Stovall is chief equity strategist at S&P Capital IQ, so we may have reason to hope he knows what he’s talking about.

Stovall has history on his side, as Yahoo’s Breakout reports. Since WWII, every time the S&P 500 rose through January and February, the year ended with the market posting a net positive return. That’s literally every time—26 out of 26 occasions. Moreover, the average return for these years was 24 percent.

stock market tickerThe first half of 2013 has seen an average return of 14 percent. Do the math; it’d take another ten percent just to keep up with the historical average.

The ongoing volatility after Bernanke indicated a possible U.S. Federal Reserve wind-down of the stimulus is, in Stovall’s view, an over-reaction. Even though 10-year U.S. Treasury yields are up significantly, the overall equity scenario remains rather healthy.

If anything, Stovall feels fiscal problems may plague second-half growth because of the sequester, which really has yet to be felt. That could have a much more immediate impact on the GDP.

Well, Stovall may yet turn out to be right—or wrong; we’ll have to wait until the end of the year for that. However, the second half of this year did start out strong. The Dow was up 65 points (a rise of 0.4 percent), the S&P rose 0.5 percent, and the Nasdaq gained 0.9 percent.

As CNNMoney notes, all of this positive action came after manufacturing expanded through June, which added yet another layer to the spreading sense of overall economic well-being. However, it’s the Fed and its possible future actions that have stolen the limelight lately. Hence why we’re seeing an overall drop in major indexes by about 1 percent over June, despite posting overall gains between 2 to 5 percent for Q2 of this year.

Meanwhile, this week will prove crucial. We’ll get new numbers for hiring and unemployment, though markets remain closed Thursday. And pressure in Egypt is growing, which could lead to a major government restructuring. That will undoubtedly send waves through the world economy.

All of which is to say that if we consider the larger picture, signs are pretty encouraging. Over the first half of the year, the S&P 500 rose 12 percent. That’s especially remarkable if you look at the historical average, which tended to be around 4 percent.


Market Start Strong in Second Half

Apple (NASDAQ: AAPL) proved a major winner, which undoubtedly pleased investors who fretted over the tech giant’s recent stock misfortunes. Rumors of an “iWatch” sent Apple shares up 3.2 percent to $409.22, reports the Financial Times. Thus far, Apple had slid 23 percent over the year to date, largely due to patent fights and stiff competition.

But the recent significant gains allowed Apple to push the Nasdaq Composite Index up 0.9 percent. And the S&P gains reflect continuing recoveries after the sell-off resulting from Bernanke’s comments about an end to the Federal stimulus program. As of now, it’s down just 1 percent since the beginning of June.

Financial companies in general put up a strong front, with Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), and Goldman Sachs (NYSE: GS) rising 0.2 percent, 0.5 percent, and 0.3 percent, respectively. The materials sector also performed well, with gains of 0.8 percent based largely on reports from Europe and the U.S. of an advancing recovery in manufacturing.

Overall, defense and utilities were the only poor performers. The pessimistic outlook here is that this year’s opening rally is largely pegged to the Fed. In other words, equities are bound to drop soon. That may have begun, but it seemed to have quickly been arrested mid-fall. A quick correction, in short.

Let’s check on what Stovall indicates might be good investment moves for the second half of the year. Consumer Discretionary stocks present a formidable earnings growth and are largely U.S.-focused. So that’s sort of a sure bet.

The other promising bet is on Financials (which, as we’ve seen, are already doing well). Stovall suggests Financials could return 11 percent earnings growth over the year, but more importantly, based on P/E, they are cheaper. Also, as interest rates continue rising, they will benefit. Those are good justifications.


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