25 September 2018

Stock Strategists Brace for September Swoon

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The only month that shows an average decline in all three periods is September. Money managers debate why that is. It could be that people sit down after Labor Day and re-evaluate their portfolios. Regardless, the arrival of September is making some people nervous now. Even some who feel bullish for the long run are warning clients to beware the ides of September.

James Paulsen, chief investment strategist at Wells Capital Management which oversees $345 billion, is a little worried. Mr. Paulsen has been one of the business’s most relentless stock bulls for years, but now he says U.S. stocks could fall as much as 15% some time this autumn. He is urging clients to shift some money into foreign stocks, which as a whole are less expensive than U.S. stocks. He emphasizes that he doesn’t think the bull market is over; it could run another five years. He explained a 15% decline would be less than the 20% drop that typically defines a bear market, but would certainly be enough to rattle investors.

Mr. Paulsen and many others expect investors soon to begin wringing their hands over Federal Reserve plans to raise target interest rates next year. Recent readings on job creation and economic growth have been stronger than expected. Many analysts and economists expect the Fed to wait until mid-2015 to raise rates. But if the economy shows more signs of strength this fall, worries could spread that the Fed will move sooner and that could trouble the stock market.

One reason money managers aren’t more worried is that, in their eyes, neither the economy nor market indicators have gone to extremes. The S&P 500 Friday traded at 19 times its companies’ earnings for the past year. That is well above the historical average of 15.5, but still far from the extreme of 40 seen in the late 1990s.

Globally, central bankers still worry more about deflation than inflation, meaning they are in no rush to raise rates. Fed rate increases are expected to be modest and slow. They could be partly offset by decisions of central bankers in most of the rest of the world to ease monetary policy and stimulate economies.

The bond market supports this view. Bond yields remain exceptionally low, suggesting bond investors expect slow inflation and economic growth. The yield of the benchmark 10-year U.S. Treasury note was at 2.347% late Friday, the third lowest of the year. Analysts said some investors were seeking safety amid worries about global economic weakness and about the risk that high-priced stocks could slump.

As for September, it can be noted that the most significant September declines have followed stock weakness in the first eight months. That reinforces the suspicion that investors re-evaluate in September and cut stock holdings when times have been bad. So far this year, stocks are up, but investors are worried anyhow. Whether that will lead them to sell in September or to hang on is the big question on many people’s minds.

Click here to access the full article on The Wall Street Journal.

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