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- August: The Market’s Doing Great and That Has Investors on Edge
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The seemingly near-perfect rally in U.S. stocks this year finally stumbled in mid-August, and that had many folks on Wall Street saying: It’s about time.
The Standard & Poor’s 500 index slumped more than 1% twice in a span of six days, after such declines happened only two previous times this year. By month-end, the market bounced back and those dips didn’t make a dent in the gauge’s year-to-date surge of 10%. But more weakness could be on the horizon.
For one, September historically is the weakest month of the year, with the S&P 500 dropping an average of 1.1%, and also experiences the most declines in aggregate, compared with other months. The gauge has fallen in about 55% of the past 89 Septembers, according to data compiled by Yardeni Research.
Meanwhile, upcoming events could give investors reason to push stock prices lower. That may seem like bad news for you — after all, you want your portfolio to increase rather than decrease — but professionals say such weakness likely will be temporary. Here’s what three of those professionals will be watching in the month ahead:
1. Wake me up when September ends
Two of the market’s primary drivers — corporate earnings and economic reports — continue to improve, suggesting stock prices will “grind a little higher through the end of the year,” says Anthony Saglimbene, global market strategist at Ameriprise Financial Services. “But it won’t be a straight path.”
Rather, September (or October) may finally bring the market sell-off so many people crave, Saglimbene says. Investors have grown accustomed to a one-way market trajectory — it’s been more than a year since the S&P 500 tumbled at least 5% from a recent peak — but such pullbacks actually are “healthy” for the market, he says. Not least because many investors would like to jump back in when prices fall a bit.
Possible catalysts? September’s docket, including Germany’s elections on Sept. 24, three central bank meetings (the Federal Reserve on Sept. 19-20, as well as the European Central Bank and Bank of England earlier in the month) and a much-anticipated debate about the federal budget in Congress. “Macro headwinds could act to swing the markets a little more than they have any other time in the year,” Saglimbene says.
Bottom line for you? “This is probably the time to maintain balance in a portfolio,” Saglimbene says, adding that well-diversified portfolios with some defensive positioning will “help in stormy times.” (Read more about how diversification can decrease your investing risk.)
2. Bonds. 10-year bonds.
Investors aren’t expecting the Fed to raise interest rates at its forthcoming meeting, and there’s a growing feeling that additional increases this year may be on hold — and the bond market is partly to blame. (Don’t understand how bonds work? Check out cheatgame.info’s bond cheat sheet.)
“It seemed like the Fed was most confident raising rates as the 10-year was ripping higher,” says Frank Cappelleri, executive director at brokerage firm Instinet. But the yield on this key Treasury note has fallen since December 2016, even as the central bank has increased the federal funds rate three times during that period. The 10-year is seen as a gauge for investors’ appetite for risk and confidence in economic growth — and Cappelleri questions whether the Fed will move unless yields perk up again.
Meanwhile, the bond market may not provide the necessary relief if (or when) there’s a sell-off in stocks, says Jeff Powell, managing partner at Polaris Greystone Financial Group. “Most investors look at fixed income as a ballast at the bottom of a boat to keep from having too much volatility in their portfolio,” he says. But the exact opposite could happen.
As Powell explains, U.S. bonds have been paying comparably higher yields than those in other countries (like Italy or Spain), which has attracted foreign investors. If the U.S. dollar starts to weaken and bonds elsewhere become more attractive, foreign investors will just as readily flee again. That, coupled with the decline in yields that has accompanied the Fed’s rate increases, could create a double whammy for investors, he says.
Bottom line for you? Don’t make any radical portfolio changes in anticipation of a stock market slump, because all investments carry inherent risks. “People investing in things they thought were very, very secure could get hurt,” Powell says.
3. Bueller? Bueller?
U.S. stocks have set a series of record highs this year, but sentiment is hardly euphoric. “People are invested more because they have to be, rather than they want to be,” Cappelleri says. While countless investors have tried to predict the next sell-off, the market’s been largely impervious to political turmoil — and events abroad, he adds. “The reaction to the news is more important than the news itself now.”
Volatility (a measure of market swings in either direction) is “exorbitantly low” by historic standards, but “equal opportunity worriers” abound, Powell says, Some people believe the market is destined to fall because it’s so high, while others fret about bad news on the horizon.
For the worry-prone, there are cracks in the market to support such views. Small-cap stocks, which surged in the weeks following the election, briefly dipped into negative territory for the year in August. Meanwhile, the biggest stocks in the S&P 500 — the likes of Apple, Facebook and Amazon — have obscured a less-rosy picture. The equal-weight gauge — which strips the index of its market-cap bias, making Apple’s contributions on par with any other stock — saw more profound declines in August, compared with the market-cap-weighted index.
Bottom line for you? Trying to predict what will cause the much-anticipated weakness has been “very frustrating” this year, even for seasoned investors like Cappelleri. Instead of trying to be a prognosticator, you’re better off keeping it simple when investing for retirement.
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