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Sweet spot for stocks is around the corner

With stocks at 2016 highs, the S&P 500 is about to enter what's traditionally one of its best months of the year and is closing out the first quarter with a surprising gain.

"What's really amazing is that for an investor that's looking at their statement at the end of the first quarter, they're going to be saying: I'm flat! What's all the noise about?' It's shocking and there was a fair amount of damage that was done in the process," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets.

The S&P 500 rose 0.4 percent Wednesday to 2,063, and is now up nearly 1 percent for the year. That gain follows a rare first-quarter snapback — when looking all the way back to 1945, according to Sam Stovall, chief U.S. equity strategist at S&P Global Market Intelligence. The S&P fell as much as 10.5 percent in the quarter. That was its deepest Q1 slide ever in a year where it staged a complete reversal by the end of March.

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Traders work on the floor of the New York Stock Exchange
Andrew Renneisen | Getty Images
Traders work on the floor of the New York Stock Exchange

"This is the tenth time we've had a decline of 5 percent or more only to get back to or close to breakeven by the end of the quarter," he said. "Five of those times we set an even lower low (later in the year). There's no guarantee we'll set a lower low but there's concern about that." Even after reaching a lower low, the S&P averaged a 2.2 percent gain in those years.

"If history should repeat, investors are encouraged to stay the course but not load up the truck," Stovall said.

Stovall and other analysts are concerned earnings could give the market a bumpy ride. The S&P 500 companies are expected to see a decline of 6.9 percent in first-quarter earnings, according to Thomson Reuters.

"If we continue to experience additional earnings erosion, then it could be like 2015 all over again, when we went from an 8 percent expected gain to a near 1 percent loss," he said.

Thursday marks the last trading day of the quarter, before April 1 — when the March jobs report is released. Thursday's data include weekly jobless claims at 8:30 a.m. EDT and Chicago PMI at 9:45 a.m.

After this week's rally, investors will focus on New York Fed President William Dudley, who speaks at 5 p.m. EDT on lessons from the financial crisis. He will take questions at the event held by the Virginia Association of Economists. Chicago Fed President Charles Evans speaks at 9:30 a.m. EDT. Fed Chair Janet Yellen sparked a risk rally Tuesday when she said the Fed would move cautiously to raise rates.

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April is usually a positive month for stocks, and the S&P 500 has been positive 70 percent of the time since 1945, ranking it as the second-best month, after December, according to Stovall. But in the past 10 years, April has been the top-performing month.

Going back to 1990, the second quarter has been a decent month for stocks — up an average 2.2 percent. The best quarter has been the fourth quarter, averaging a 5 percent gain.

The S&P has gained an average 1.41 percent in April going back to World War II, versus an average of 0.65 percent for all 12 months.

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In second quarters dating to 1990, the S&P has gained an average 2.2 percent and was higher 58 percent of the time, Stovall said. He said over that time all 10 major S&P sectors saw second-quarter gains anywhere from 1.3 percent (telecom) to 3.5 percent for health care. All sectors posted gains at least 54 percent of the time, with the best Q2 performer being health care, up 69 percent of the time since 1990.

Golub said he is looking at two growth themes in the stock market. He likes stocks that led the market last year — the FANG stocks and biotech, and then slower steady growers. "Boring companies that are 2 to 4 percent growers but have high visibility and low risk. You have defense contractors or companies like Waste Management that are growing. … None of them need the economy to do well in order to grow," he said.

Some of the other names on his list include General Mills, Pepsico, Procter & Gamble, Johnson and Johnson, Pfizer, Aflac, Marsh and McLennan, Cintas, Lockheed Martin, McDonald's, Verizon, Airgas and Danaher.

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