Bullish Signal Not Seen in 60 Years May Fuel S&P Rally: Jeff Saut

Midterm elections to Congress are coming up in November, and a bullish sign last seen 60 years ago is being flashed by the S&P 500 Index (SPX). According to Jeffrey Saut, chief investment strategist at Raymond James, the last time two times that the index posted monthly gains in April, May, June and July during a midterm election year were in 1954 and 1958, and the market was up sharply in the remaining four months of those years, CNBC reports. "Each one of those times, the market, after a soft first part of August, rallied sharply into year-end," he added. Saut predicts a new record high of 3,000 for the S&P 500 by year-end, representing a gain of nearly 7% from its current value, and an advance of 12.2% for the year.

Bullish Sign: S&P's Four-Month Winning Streak

Month S&P 500 Gain
April 0.3%
May 2.2%
June 0.5%
July 3.6%

Source: Yahoo Finance

Speaking to CNBC on July 31, Saut anticipated "some weakness in the early part of August," based on "the crack in the FANG stocks and the fact that the small caps have broken down." CNBC notes that the S&P 500 dropped by more than 1% in the first week of August in both 1954 and 1958, before staging a strong finish to those years. During the first two trading days of August in 2018, the S&P 500 gained slightly less than 0.4%.

What Happened 60 Years Ago

Last 5 Months Of S&P 500 Gain
1958 17.0%
1954 16.5%

Source: CNBC

'Finding Other Ways to Invest'

Saut's optimism that the market will stage "a strong recovery into year-end" is based not just on history, but also on its reaction to the recent "crack in the FANG stocks." As he told CNBC: "While the money is coming out of the Facebooks and Twitters of the world and the Intels of the world, it's finding other ways to invest. A few years ago in the tech carnage, if Facebook would've coughed up a hairball like it did, the whole market would've imploded. And that just didn't happen last week."

July was the best month since January for two other major U.S. market indices, Barron's reports. In addition to the S&P 500, this also was the case with the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite Index (IXIC).

Expect More Volatility

"I think volatility is likely to pick up, because it normally does, and I think the trade tensions are still out there and nothing was really resolved with Europe," as Sam Stovall, chief investment strategist at CFRA, told CNBC. Looking at history going back to 1945, he finds that daily moves in the S&P 500 average 0.6% in August overall, but rise to 0.8% on average in August of a midterm election year.

Another Look at Market History

Paul Hickey, founder of the Bespoke Investment Group, a research firm, indicated to CNBC that August typically has been a weak month for equities in every year since 1983, with stocks frequently enduring a slow and steady decline through its first 10 days. He notes that August has been particularly weak during the current bull market.

Regarding years in which the S&P 500 posted gains in April, May, June and July, Hickey finds 11 instances since 1928 overall, whether or not midterm elections were on the docket. While stocks averaged a decline of 0.2% in August of those years, they posted an average gain of 10.8% during the rest of the year.

Correction Ahead

Morgan Stanley, meanwhile, warns that the biggest correction since February is likely to begin soon, MarketWatch reports. The standard definition of a correction is a market decline of 10% or more, with a drop of 20% or more being the accepted measure of a bear market. Morgan Stanley expects technology, consumer discretionary and small-cap stocks to be the hardest hit. (For more, see also: Trade War Threatens Small-Cap Stock Juggernaut.)

Jamie Dimon, the chair and CEO of JPMorgan Chase, recently voiced concerns that trade tensions and the unwinding of the massive Federal Reserve balance sheet are the biggest risks to the economy, which otherwise is "quite strong," and to the stock market. Other leading investment professionals and market pundits are anticipating a sharp decline in stock prices. (For more, see also: Jamie Dimon: Fed QE Strategy May Cause a Market Panic.)

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