Market volatility is 'about to pick up': Sam Stovall

Well, the NASDAQ closing at a record for the fifth straight session on Friday, notching a 3% weekly gain. Markets are great across the board so far this year as Evercore is predicting that the S&P 500 will have another double digit rally through the end of the year, raising its forecast for the index to hit 6000. But the Wall Street Journal writes investors fear the quote long stretch of calm and markets can't last. Joining me now is CFRA investment strategist Sam Still All Sam. So let's talk about this because, you know, the Journal makes the point that volatility has been incredibly low and has been smooth sailing for the first part of the year. Markets are on a tear, NASDAQ hitting another record. They basically make the point that this is the calm before the storm. What do you say? Well, good morning, Cheryl. I guess it depends on how bad of a storm you're expecting. I do believe that we are due or in the coming months due for another decline of 5% or more. I mean that is traditional. It's something that after strong first quarter gains going back to World War Two and this year was one of the top 15. Basically we've had two declines of 5% or more on average within those years. But the good news is that the average gain for top 15 was 20 plus percent for the entire calendar year. So, yeah, I do think volatility is going to pick up, but I do think also that the year will end on a positive note. I want to pull up the tenure right now and the yield on that because it's interesting the kind of the commentary we've been getting from Minneapolis Fed president, Federal Reserve President Neel Kashkari. He says the central banks in a good position to take their time with cutting interest rates and that more data is needed. And we are going to hear, by the way, from the Bank of England on Thursday, they are expected to hold interest rates steady at 5 1/4%. But what do you make of these comments from Kashkari? Well, I think he's been more of a hawk than other members of the FOMC. And as a result, both sides I think are giving their explanation as to why the Fed will remain data dependent. We were surprised favorably by both the consumer price index and the producer price index. The end of the month. We think that we will get further downward readings for the personal consumption expenditure or the PCE which the Fed tends to favor. So we will be getting additional data and every election year since 1992 except 2012 had the Fed make a move in monetary policy during that election year, many times occurring in September. So if given the opportunity, I think the Fed would like to show that it is independent. We have a lot of thoughts on said about about that last point in particular because it is an election year. And I want to bring Luke Lloyd into this because, look, you know, we get and, and Liz as well, because, you know, we're getting these, these comments from the Fed. But really, unless you get a September rate cut, that does not help Joe Biden. Liz, that does not help Joe Biden whatsoever. I know he's he's on. He stood in front of a microphone earlier this year and said, well, we're going to get a rate cut. Yeah, he told me we're getting that rate cut. We were, we were talking about this earlier. There are a lot of people who I think are backing Joe Biden in the Fed sort of universe who are saying, no, no, we have to wait. We have to wait September, that could be the October surprise, right? You get a nice rate cut in September and market takes off. That's a very, very kind of nice back wind at the back of Joe Biden going into the election. You know, and also, Luke, you know, the Journal writes when they talk about caution, one of the biggest thing that's been driving the markets, We know this is AI. And you've had huge gains for Apple. You've had huge gains for NVIDIA, but there are other parts of the market that aren't showing that type of strength. What do you have without that? Well, it's interesting AI, it's been the same story over and over again. But from my standpoint, I'm also kind of worried about AI being making a nation of regurgitators in this the college students being trained of you go Google or use a ChatGPT to, you know, learn and, and to to implement, you know, to go, you know, with what what they're thinking. And that concerns me about the nation of innovators. We aren't a nation of innovators anymore. We're a nation of regurgitators. So I think that actually actually impacts the economy in the long term. One thing I'm actually kind of taking a look at from a negative side of things. But Sam, I want to actually take a look at the market with the election coming up. You know, typical drawdowns in the market in the election year, if the incumbent wins is about 6 or 7%. So far this year, we've seen a six or 7% correction. If the incumbent loses, it's about 16 or 17% that we received, you know, which would price in a Trump victory. If Trump continues to gain in the polls and is looking like a Trump victory is coming, are we going to see that 16 or 17% correction? Good morning, Luke. Well, you're absolutely right that traditionally if the market declines from July 31 through October 31, every time that has happened except once the market indicated that the incumbent was going to be replaced, we've already had a 5 1/2 percent decline. History would tell us that we'll probably have another decline, which will probably end up being closer to about a 12% sell off, which would bring the S&P down to about 4800. But again, the likelihood is that we do end the year on a positive note since after the election the market tends to do fairly well 'cause now the uncertainty has been resolved. So I, I would tend to say fasten your safety belts because the volatility in my opinion, will likely be picking up. So you you agree with the Wall Street Journal's stance that that we are dealing with the calm before storm. I do. I'm looking at the PE on the S&P 500, realizing it is trading at a 32% premium to its average PE over the last 20 years. We're looking at the technology sector, which is trading at 32 times as well. That's just it's outright multiple, which is the highest that we have seen in the last 20 years. The S&P with its 29 new all time highs is currently trading 13% above it's 200 day moving average and the the NASDAQ is 16% above and they're more normally in the three to 4% area. So I would tend to say that it's time for a resetting of the dials to allow this bull market to continue. Interesting. Sam Stovall, it's always good to have you on the show. Thank you.

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