Stocks Have Had a Great Year. Cue the September Effect.
global financial crisis. But there are warning signs that this year’s rally could lose steam. Valuations are above their recent norms, with the S&P 500 trading at 19.4 times forward earnings estimates, according to FactSet.
The one-year average is 17.7 times. Inflated valuations alone don’t cause stocks to drop, but they can make a decline more severe. Meanwhile, the 10-year Treasury yield is at its highest level in nearly a year, making it less attractive to hold stocks instead of bonds.
On the borrowing front, some fear the repercussions of the highest interest rates in 22 years have yet to take full effect in the economy. And many investors think the Federal Reserve will need to keep rates higher for longer, particularly with rising oil prices threatening to stoke inflation again. “If we were to put the kibosh on the idea that the Fed is done, then we might have an issue," said James Bianco, president of Bianco Research.
U.S. economic growth accelerated in the second quarter from the first three months of the year, raising hopes that the Fed would manage to pull off a soft landing. Yet some bears think it is too soon to say the risk of a recession has faded.
“We’ve just been through the most aggressive hiking cycle in my career. It’s a bit presumptuous to think we’ve felt all those effects," said Rob Williams, chief investment strategist for Sage Advisory Services. He said that the outlook is better for bonds than for stocks.
Within stocks, he prefers more-defensive sectors such as consumer staples that tend to perform steadily even in a sluggish economy. So far in August, the S&P 500 is down 1.9%, compared with its average gain of 0.67% for the month. The information technology sector, this year’s best performer, is
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