Sam Stovall on Markets, Momentum, and Managing Risk: A Wide-Ranging Conversation with CFRA’s Chief Strategist

In a recent in-depth conversation with Capital and Power, Sam Stovall, Chief Investment Strategist at CFRA, offered a pragmatic, history-rich framework for thinking through today’s markets. From the “traumatic threes” of bull markets to the enduring power of compounding, Stovall pulled together lessons from history, investor psychology, and economic signals to help investors separate noise from narrative.

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The discussion opened on the nature of market downturns, where Stovall emphasized the tendency of investors to rotate “from the first to the worst.” When volatility strikes, defensives like staples, health care, and utilities tend to outperform. As he quipped, “When the going gets tough, the tough go eating, smoking, and drinking.” But after the storm passes, opportunity often lies in the most beaten-down sectors. “Investors tend to rotate from the best performing sectors during the decline to the worst performing sectors... because many of these companies were priced to go out of business, but did not.” Historically, these unloved areas outperform the S&P 500 in the year after a 10%+ decline—sometimes dramatically so.

Stovall highlighted that the darlings of bull markets often become the scapegoats of bear phases. “The heroes in the prior bull market then become the villains,” he said, pointing directly at megacap tech as a current risk pocket. These names, once bid up on “a new theme, a new trend, earnings growth potential,” are vulnerable to steep corrections once investors start profit-taking. “A bull market takes the stairs, but a bear market takes the elevator,” he warned.

That concern is timely given that we’re now in year three of a bull market that began in October 2022. “When you think of child rearing, you say the terrible twos. But when you think of bull markets, think of the traumatic threes.” Of the 11 bull markets that survived two years post-WWII, year three saw an average return of just 2%. He also cautioned about bear market “fakeouts,” noting that “50% of all bear markets had at least one fake out of 20%, with the bear market of 2000 through ‘02 scoring five.”

The dominant risk in the current environment, according to Stovall, is recession—particularly one driven by trade policy. “What I'm saying is that tariffs could end up being the trigger that throw us into recession,” he said. And don’t expect a timely heads-up: “The National Bureau of Economic Research... don’t tell us we’re in recession until seven months after the recession actually started.” He reminded listeners that the S&P 500 often anticipates recessions by about six months.

For investors worried about downturns, Stovall offered a practical alternative to market timing. “A portfolio of 50% tech, 50% staples rebalanced annually gave you 95% of the return of tech, but with 40% less volatility.” He also noted that CFRA’s outlook is not short-term focused: “Our analysts look more 9 to 12 months down the road when they make their buy, hold and sell recommendations.”

To help investors anchor their thinking, Stovall offered definitions for short, intermediate, and long-term time frames—each pegged to the average time markets take to recover from pullbacks of varying severity. A correction (10–20% decline), for instance, typically takes just four months to fully recover, putting “intermediate-term” squarely in the 4–12 month range. Bear markets, even severe ones, historically get back to breakeven in around 13 months. And while some investors fear multi-decade drawdowns, Stovall noted, “Since World War II, we have had three mega meltdown bear markets… and the average has been five months to get back to breakeven.”

This long view also applies to his outlook on U.S. dollar hegemony. “Has the US lost its reserve currency status? I don’t think so, because where would you go?” Despite occasional headlines about global de-dollarization, he reassured listeners: “The US dollar remains the most stable currency in the globe.” Even a period of dollar weakness would be more likely to boost international holdings than to signal the end of an era.

Throughout the interview, Stovall circled back to key principles that guide his market approach. He warned that it’s not always rewarding to be pessimistic: “If you are bearish and you’re wrong, you’re ridiculed. And if you’re bearish and you’re right, you’re hated.” He also reiterated his long-held belief in momentum investing. “Let your winners ride, but cut your losers short.” Citing research by James O’Shaughnessy and his own analysis of 10-month moving averages, Stovall recommended reviewing sector momentum monthly and rotating into leaders to capitalize on persistence in performance.

One seasonal rule he stands by is “as goes January, so goes the year.” After a brutal 2022, Stovall turned bullish following a strong January 2023. “Whenever that had happened since World War II, we had a down year followed by an up January, the market was higher 92% of the time and was up about 20% on average.”

On interest rates and Fed policy, Stovall acknowledged the headwinds: “Think of it as a ball and chain if you're trying to run in a track meet.” While he believes the Fed wants to keep 10-year yields below 5%, he emphasized that interest rates remain the single most important variable to monitor. “If I had to pick one item to monitor and whether that will help or hurt the returns of my portfolio, it would be interest rates.”

As for where he’d put money to work today, Stovall didn’t hesitate: “If you’ve got an unlimited time horizon, you really do wanna be going for growth.” He sees opportunity in technology, noting that today’s valuations are “half” of what they were during the dot-com bubble. He even gave a cautious nod to crypto, saying “cryptocurrency is a wave of the future,” though he reminded listeners it “doesn’t offer any dividends, does not offer any earnings. It’s only what the next person is willing to pay for it.”

Beyond tech, Stovall flagged several under-the-radar recovery plays: “Communication services, consumer discretionary, technology,” along with “independent power producers,” “semiconductors,” and even “passenger airlines,” which he said are “bouncing back quite nicely.”

And as for fears that AI might make markets perfectly efficient? “AI is… written by humans,” Stovall reminded the audience, suggesting embedded human bias may persist. “Maybe we will end up having AI sort of be the new emotion of the individual.”

In a conversation filled with historical perspective, tactical insight, and trademark wit, Sam Stovall reinforced his core message: stay grounded, respect market history, and stay focused on fundamentals. “Time is the great neutralizer of volatility,” he said. “Invest often and early and you'll let compound interest do most of the work for you.”