According to Sam Stovall, chief investment strategist at CFRA, investors who want to profit during a potential “summer slumber” should take refuge in the typically defensive areas of the market. In a recent client note, Stovall wrote that since 1945, the S&P 500 has only risen 1.6% on average between the Memorial Day and Labor Day holidays, despite prices rising in two of the three years. According to Stovall, the historical average return for June is just 0.1%, while July typically sees a 1.2% gain. “So instead of experiencing the summer blues throughout the entire three-month period, you’re more likely to enjoy a summer slumber,” he said. This is in line with the well-known “sell in May and go away” adage, which suggests that investors tend to pull out of stocks in the early summer months and then buy back in the fall.Even in the face of a possible summer slowdown, Stovall remains optimistic that the S&P 500 will hover around 5,470 by the end of the year and reach 5,610 12 months from now. The index was trading near 5,425 late Wednesday. Summer exceptions With the presidential election approaching, Stovall said this summer could be an exception to the typical summer slump, noting that in the 19 election periods since World War II, the broader market index has posted an average summer gain of 3.7%. “This year could see a similarly modest uptrend, albeit with more volatility, as investors weigh rising valuations, future earnings expectations and the start of a new monetary easing cycle in the tough conditions before a closely contested presidential election,” Stovall said. Ahead of this year’s election, Stovall expects several aerospace and defense contractors to stand out.Stovall noted CFRA’s picks for Eli Lilly and Walmart, and said traditionally defensive groups like consumer staples and health care should also do well if the overall market weakens between May and October. Here are Stovall’s favorite stocks: Companies like Lockheed Martin and General Dynamics “should end up doing pretty well,” Stovall said. He expects both Democrats and Republicans to talk about the need for increased defense spending during the election. CFRA’s proprietary metrics are positive for both companies and the aerospace and defense industry in general, he said. Lockheed Martin shares are up 1.4% this year, significantly underperforming the overall market, while General Dynamics is up 13.4%. Improved Sentiment for Defense In a recent note, Morgan Stanley said sentiment has improved in recent months, noting that in late April shares of major U.S. government defense contractors, including Lockheed Martin, were trading at about a 15% discount to the S&P 500 index. Stovall said other areas of the market he believes will weather the summer slump and thrive are consumer staples companies, tobacco stocks, medical wholesalers and pharmaceuticals. He recommended major retailers Costco, Walmart and BJ’s as his top discretionary picks, with Eli Lilly and Becton Dickinson as the firm’s preferred healthcare stocks. Costco and Walmart shares are up about 29% and 2%, respectively, this year, posting solid returns as consumers become more price- and value-conscious in a high-inflation environment. BJ’s is similarly up about 32% this year. JPMorgan raised Walmart’s investment rating to overweight from neutral and its price target to $81 on Monday. That would suggest a 21% increase from the previous day’s close. “With a highly uncertain second half of 2024 and a soft (to softening) consumer environment, we believe Walmart shares offer a strong balance of defense and offense on both the top and bottom lines,” JPMorgan analyst Christopher Horvers wrote in a client note, adding that Walmart’s earnings per share should grow by double digits for several years, given “market share gains, growing benefits from alternative profit pools, and an inflection in international margins.” Medical device maker Becton Dickinson is down 4% in 2024, but analysts surveyed by FactSet have an overweight rating for the stock, citing the potential for an 8% upside.
CFRA’s Stovall says these stocks could weather Wall Street’s summer downturn.
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