U.S. stocks closed mixed and off their session lows on Thursday, ending the four-day losing streak for the major indexes prompted by comments from Federal Reserve Chairman Jerome Powell, which signaled the U.S. central bank will continue to make efforts toward lowering inflation. The Nasdaq fell 0.3% for its first five-day decline since February. Sam Stovall, Chief Investment Officer of CFRA Research, joins Cheddar News' Closing Bell to discuss.

Closing Bell

U.S. Stocks Close Off Session Lows

I'm gonna bring you the results from lulu as soon as we get them in the after hours. But for now I do want to turn back to the major indexes as we start the month of september joining me now is SAm Stovall, chief investment strategist at the independent investment research firm at c f r a Research. SaM, it's great to have you on as we start a new month. I know september a historically lower month. What does history tell us about what might be in store during the month of september? Well, kristen good to talk to you again. Yes, september is only the second month of the year to post an average decline along with february and in terms of frequency of advance, it's the only one to decline more frequently than it has risen. Volatility has been relatively high. This, uh, usually in September and this year, uh, if we are continue at the same pace, will probably end up with um being the third most volatile year since 1945. Behind 2008 and 2002, Wow. As to 2008, of course, the financial crisis in 2002, I'm sure the unwinding of the.com bubble, is that the case? Yes. So you could almost, at first glance, you'd probably think, Oh, that's not good news, but when you think about it, 2002 was the end of that bear market and also the latter part of 2008, most individual stocks bottom then and had a successful retest in March of 09. So one could say that because of this elevated volatility, we are closer to the end than the beginning. I think a lot of people would agree aside of relief Sam if that is the case, especially those near retirement age, anyone trying to save for a home or simply increase their own portfolio in the wake of sky high inflation still at its highest pace roughly in about 40 years or so. We do see the market any mix today. What else do investors need to know as we approach another Fed decision come mid to late September? Well, I think investors need to realize that the market is going to remain very volatile. The trend is not our friend currently uh and will probably be that way until we get the employment data tomorrow. The C. P. I. Data in the next week or so. And then the Fed meeting itself. So an awful lot of reasons for investors to be worried. Um But our belief is that while we're challenging the june 16th low, there's still a likelihood that that low will remain the low for this bear market. Um So investors just need to make sure that their emotions don't become their portfolios worst enemy. Yes. Okay. Very good point. Keep the emotions in check as we start the month of september, but it sounds like SAm as you were mentioning there. You don't think that will retest the mid june lows. Why is that? Well I think we could retest, but I don't think that we're gonna break below it. One indicator is that if we end up recovering 50% of a bear market decline while we might go down and retest the low, we don't go on to set a lower low. And that has been the case every time going back to World War two. That's history. It's not a guarantee. But it certainly can be encouraging that it's happened many times before and might happen again this time. I think it's also important to note that the Fed, I mean is making it loud and clear SAM it would seem that we are going to get another three quarters of a percentage point rate rise. Come this september 21st Fed decision, of course it's data dependent. Of course we have a very important jobs report out tomorrow. More inflation data ahead that will go into shaping its decision. But the Fed chair himself on friday Fed president of new york, john Williams on Tuesday, Loretta Mester yesterday, Fed president of Cleveland. It seems like they are trying to prepare the market for another 75 basis point rate rise. What would history tell us about the Fed speech and whether or not that in and of itself that decision could be a volatile one come september 21st. Well, certainly the Fed is priming the pump if you will letting investors know that there is a very good likelihood that they will raise by 75 basis points. Um, and I think investors then have to realize that they might not be done just yet. However, we still anticipate that inflation will be moderating and that come December of this year, the year on year change in CPI I will be at 5.9% And then 2.5% by December of 2023. So our feeling is that the trajectory is definitely lower and if we end up getting even more favorable CPI readings that I think that could add encouragement to investors. Okay any history Sam that you can share about Again, a lot of people would have seen inflation across all different sectors digging deeper and deeper in savings just to get by the highest inflation, the quickest pace that we've seen in 40 years. What would history tell us about how long it's gonna take to cool inflation back down to the Fed's long term target of 2%. Well inflation. Um, going back to World War Two, whenever we have had the year on year change of headline CPI I exceed 6.5% and remember we got up to 9.1% recently, whenever it was above 6.5% we fell into both a bear market and the recession, the recessions ended up lasting an average of 10 months. Uh, and also, you know, if this ends up being like the 19 seventies all over again, compound annual growth rate will only be about 1.5% as it was back then. So that could certainly be a challenge. And whether it's utilities, whether it's gasoline, whether it's food, clothing, etcetera, uh Certainly the average american will have to tighten their belt uh in order to make ends meet Any winning and losing sectors. Sam that your data would tell us might be ahead. Of course, we continue to see the ten-year Treasury yield now climb above 3.2% at the two year yield today, at its highest level since 2007. Right on the cusp of the start of the financial crisis. What is your data show about sectors that could do well in sectors that might be underperforming ahead. Well, if the inflation picture continues, if the concern about higher rates uh progresses, then we're basically seeing the strength that will likely continue, meaning that the inflation hedges like energy and materials will be out performers. And the defensive areas like consumer staples and health. I mean utilities will end up being performers. Whereas the growth high valuation groups like communication services, consumer discretionary and technology will continue to be under performers. So it really depends on how long this inflation and you know, pressure on the high P. E. Groups will last. Another question that I have for you. Sam is come the end of the year. We know sometimes there always is a bit of window dressing. I think people pretty much caught flat footed at the start of this year. Thinking that after the first two trading days of record highs, we would not be in the position that we're in now. We would probably be at new record highs. But instead we did see pretty intense selling And so as investors try to plan for the rest of this year and the beginning of next year positioning their portfolio of course trying to be savvy when it comes to taxes. What might you suggest they do? Well, I think right now if you have an awful lot of red ink, what you can do is is take those losses and simply flip them into uh if they happen to be in companies or in E. T. F. You can take do some tax loss harvesting meaning, let's say you have an S. And P. Five 100 E. T. F. Well you can sell one at the loss and then at the same day by back into another one. And then that way you you haven't changed your exposure to the market but you are able to capture that short term or long term loss. So that's one thing history did warn us that we could end up having a challenging year because we were up by more than 20% last year and any time that happened the year following ended up declining an average of 11%. So history does give us some encouragement that whenever we've come to the end of the midterm election year from october 31st of the year, like this one to the october 31st of the third, Third year of a president's term in office, the market has never declined on a total return basis and has risen an average of 21%. So should history repeat? There's no guarantee it will. History basically says be prepared for a good run from October to October. Of course, the midterms a factor in this as well saying my final question to you is, how do the midterm elections factor into this bigger picture? Well, originally, what you find is that the first year of a democratic president ends up losing 26 seats in the house and four seats in the Senate, which would just automatically switch control to the Republicans. However, because of many issues that have been raised, uh, causing the Democrats to come out or likely to come out in numbers now, it seems as if there is a good possibility that the Democrats will retain control in the Senate, but the republicans possibly take control of the House. And history says a split. Congress usually does best for the market because if nothing, in a sense comes out of Washington to serve as a headwind for equities, then investors breathed a sigh of relief. Ok, Sam Stovall joining us on the first official training day of september SAM, Thank you as always, SAM's the chief investment strategist at CFR I Research.