November market may end up 'stealing from Santa:’ CFRA on predicting a weaker December

Yahoo Finance's Alexis Christoforous and Sam Stovall, CFRA Chief Investment Strategist, discuss market moves amid Cyber Monday.

Video Transcript

ALEXIS CHRISTOFOROUS: So this pullback we're seeing today in the market, do you consider this a buying opportunity, or is it the beginning of a larger, sustained sell-off?

SAM STOVALL: Hello, Alexis. Well, I think the market right now is going through the beginning of a digestion phase. Last week, we had the Dow Jones, the S&P 500, and the Russell 2000 all hit simultaneous new highs.

And history basically hints but obviously, does not guarantee that in the next 22 calendar-- trading days, which is essentially one calendar month, that the market goes nowhere. And it is a coin toss as to whether it's up or down.

Also, with today being the last trading day of November, and it looks as if we're going to be in a very low double digits again. Because November was very, very strong. It might end up stealing from Santa. And we might end up having a weaker gain in December than we normally would.

ALEXIS CHRISTOFOROUS: I know that you are a historian of the Market, Sam. And last week, we had the S&P, the NASDAQ, and the Dow hit record highs. Also, the Russell 2000, by the way, not to be left out-- that small-cap index hitting a record high. When you look back at history, when is the last time we saw something like that occur? And what does that tell us about-- that particular scenario tell us about the short-term future for the market?

SAM STOVALL: Well, it has been quite some time since we had all four of them. It's because the Dow has been a bit of a laggard when compared with the S&P 500. If you look just at the 500 and the NASDAQ as well as the Russell 2000, then it was just a short time ago that we hit that level.

So I would tend to say that it's a measure of enthusiasm across the board. One could say that it's favorable because of the breadth that it offers, meaning we're not just being driven by narrow behemoths.

When you look, 95% of the near 150 subindustries in the S&P 1500 are trading above both their 50-day and 200-day moving averages. So there is movement by a variety of groups within the broad market. But I think as a result of that, after a while, you have nobody left to buy or at least to push the share prices higher.

So I would tend to say that we're probably ready to digest some of these gains. And then I would regard that as a buying opportunity.

ALEXIS CHRISTOFOROUS: I want to get back to those small-cap stocks. Because the Russell 2000, on track for its best month since its inception in 1984-- do you see investor appetite for small-cap stocks continuing into 2021? And what do you think's going to be the tailwind for these particular stocks, Sam?

SAM STOVALL: Yes, I do think that we are likely to see this movement into small-caps continue for a while. Basically, in the past, we've had many false breakouts. So I say fool me once, shame on you. Fool me 12 times, shame on me.

But we believe that this time, we really could have a sustainable movement. And I think really, it's because we're rotating away from many of the growth areas gravitating toward the value areas-- small-caps and mid-caps and even international stocks as this bull market progresses.

One of the driving factors will be earnings growth expectations for 2021 where the growth is now expected to be close to 80% for small-caps, about 36% for mid-caps, and 21% for large-caps. So the greatest amount of growth potential is in the smaller-cap area.

ALEXIS CHRISTOFOROUS: What about those stocks that have suffered the most during the pandemic? Energy has underperformed the market-- bank stocks as well. We've seen them rallying though, recently in the market.

Do you think that we've turned the corner and that these stocks could be on an upswing in the early part of next year?

SAM STOVALL: I think that's certainly a possibility. I mean, energy was just dragged down so far that you could think either the group goes out of business entirely, or it represents a great buying opportunity. Of the eight best-performing subindustries in the month of November, four of them were in the energy area including coal.

So it is sort of surprising the snapback that we're seeing. The concern is whether OPEC decides to increase the output because of the higher oil prices to take advantage of that. So right now, our concern is that maybe some of this enthusiasm will be tempered by an increase in supply.

ALEXIS CHRISTOFOROUS: You know, Sam, we've seen how investors have been banking on-- on a vaccine. But what about things that could derail this market rally? Could there be hiccups as we try to get the vaccine out to many people and distribute the vaccine?

We also continue to have rising number of infections. So what could be the thing or things that derails the stock market rally?

SAM STOVALL: Well, I think that if we end up with having much tighter lockdown scenarios across the country where we do find that there is more problems in terms of employment, in terms of paying rent as well as mortgages, et cetera, and we end up with a softer than expected first quarter in terms of economic growth, that could be a problem.

If we also see weakening earnings growth expectations for the first 1/2 of 2021, that could be a concern, or if we find that people are just not willing to take the vaccine. They're waiting for the next person to try it out first to see how well they respond. All of those factors together could affect timing, which could then affect share prices.

ALEXIS CHRISTOFOROUS: I'd like to get your thoughts on retail. Because as we see the numbers come in from the weekend, Black Friday was a complete bust for foot traffic-- down more than 50% at brick and mortar-- online spending though surging 22% to a record high. And then, of course, you have Cyber Monday today.

And + all indications, things are going gangbusters there. What's your outlook for-- for retail stocks? Do investors need to be very picky here if they're going to wade into those waters?

SAM STOVALL: Yes, I think so. Expectations are that we could see a 15% increase in Cyber Monday online traffic versus 2019. So that would be a very strong report. But it would really only be benefiting companies like Amazon, like Walmart, like Best Buy, whereas you'd be wanting to remain staying away at arm's length from companies like Nordstrom, Penney's, like Macy's.

So those + stores or those that have really not embraced the new technologies-- those are the ones you would want to avoid, whereas those that have dived into the-- the new e-commerce space are likely to do fairly well.