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The stock market seems to be stuck in “up” mode lately. The S&P 500 just closed a seventh consecutive month of gains, recording daily declines only six times in August and setting 53 new all-time highs so far this year. That’s a breakneck pace of a new record set almost every three trading days.
Until August, the S&P 500 has jumped more than 20% year-to-date, about double its long-term historical average. Investors continued to rule out any greater threat to the economy from an increase in the number of cases of Covid-19 delta variants and barely reacted after Federal Reserve Chairman Jerome Powell reported that the central bank is likely to start to fray its $ 120 billion monthly bond purchases by the end of the year.
There are reasons to expect more gains to come: Just look at how badly the economy has already healed, notes Matt Stucky, senior portfolio manager at Northwestern Mutual. For example, the labor market has recovered around 75% of the jobs lost in mid-2020.
“We are optimistic that even with the market gains this year, we can still progress from here,” he says.
And yet September also calls for caution: the stock market is heading into what has been its historically weakest month of the year, and investors may shift some positions ahead of the third quarter earnings season that begins in October. , says Keith Buchanan. , Senior Portfolio Manager at GLOBALT Investments.
“This is a period over which, as a company, we are cautious,” he says.
The market’s ability to post an eighth consecutive month of gains will largely depend on how the Fed communicates its plans and any changes in the momentum of the economic recovery. Here’s what investors will be watching.
Fed policy hasn’t changed yet
In a speech at the Jackson Hole Economic Policy Symposium in late August, Powell reiterated the central bank’s commitment to easy money. As Covid-related uncertainty persists, Powell has indicated that the central bank may start buying fewer bonds, known as tapering, by the end of the year.
In the aftermath of the global financial crisis, the Fed’s decision to start cutting back on bond purchases sparked market turmoil in an event called the taper tantrum. This time around, policymakers will try to avoid a similar reaction, Buchanan says, making the communication “critical so as not to surprise the market.” Investors will have another opportunity to hear from the Fed fairly soon, as the central bank has scheduled a regular meeting scheduled for Sept. 21 and 22.
Even before the Fed’s Jackson Hole conference, however, market participants were signaling that they were bracing for the possibility of a phase-down ahead, Buchanan notes. This was best reflected in a slow increase in the yield on the benchmark US Treasury bond during August.
Regardless of when tapering officially begins, the prospect of higher rates is still far away.
“The timing and pace of the upcoming reduction in asset purchases will not be intended to send a direct signal about when to take off interest rates, for which we have articulated a different and significantly stricter test,” Powell said in his Jackson Hole speech. .
Meanwhile, inflation continues to rise, although the Fed still maintains that the causes are mostly temporary in nature, an idea Northwestern Mutual agrees with, Stucky says. Nonetheless, any sign of a sharp and lasting rise in prices will be important to watch because the stickers shock in some market, like lodging, could have a wider economic impact, he adds.
Fortunately, the economy has recovered significantly from last year, which puts markets in a better position to deal with a possible change in Fed policy, Stucky said.
“The reduction in asset purchases by the Fed is unlikely to have the kind of dislodgement effect as if it were another kind of economic recovery,” he notes.
Could Covid Slow Down the Speed?
The jobs report slated for release on Sept. 3 will reflect a full month of any potential impact the Delta variant has on the pace of economic growth, Buchanan said.
This information will arrive at a key time, before the third trimester. winning season which begins in October. In mid-August, Wall Street analysts predicted that companies in the S&P 500 will announce earnings growth of nearly 28% over the previous year, according to figures compiled by FactSet.
However, if this level of growth remains achievable until the last quarter of 2021, it may depend on the surprise of the most recent employment data. But already, other economic indicators predict that future economic gains could be more cautious.
Two models for forecasting the rate of growth of the Federal Reserve’s gross domestic product (GDP), one New York Federal Reserve and the other from the Atlanta Federal—Indicate more moderate gains in the third quarter than previous estimates. And consumers reported no more uncertainty on the general state of the economy in recent weeks, with dissension between age groups, according to the Forbes Advisor-Ipsos US Consumer Confidence Weekly Tracker.
How the rise in delta variant cases continues in the coming weeks will be key to how the market – and the economy more broadly – performs as the year-end approaches, Stucky notes. This has led to a bit more anxiety in the market, although “there are good signs that the worst may be behind us,” he adds.
How to invest in September
September is historically the weakest month of the year, with the S&P 500 posting average declines of 1% in the month dating back to 1928, according to Yardeni Research. Expect some volatility, or at least a change in asset allocation between growth and value stocks as professional investors try to predict the Fed’s next steps and what businesses will expect around 2022 during the earnings season, Buchanan said.
Volatility has been fairly moderate recently, so the eventual return of larger daily swings up or down, whether in September or later, is likely to be more pronounced, Stucky notes.
“Compared to what we’ve been through, it will seem higher, but it’s not that different from the story,” he says.
The winning trifecta of Covid, inflation and Fed policy – which have been the dominant themes in the market for months – is expected to continue, according to Stucky. This has seen investors soar to quality assets like large cap growth stocks and Treasures, even if those lagging behind in the market have room to catch up, he adds.
With so many uncertainties around Covid in particular, a diverse portfolio with a mix of diverse stocks is the best approach.
“That’s what we preached to customers,” Stucky says.