The summer doldrums typically last from late June to mid-October. While the entire U.S. stock market is weak during this time, stocks have historically outperformed during this period. Health Care and precious metals stocks have historically outperformed during this time period. This week, the Fed Chairman Jerome Powell is scheduled to appear before Congress. If you are planning to buy stocks during this period, Knapp advises caution.
Despite all of the recent bright spots, there is still some room for concern. The inflation-adjusted S&P 500 index is almost double its trendline value. Although stocks are far above the highs of the tech bubble in 2000, the long-term productivity trend remains intact. Even though many investors are on vacation, they can trade during this time to protect their investments.
While the market has been trending higher all year, investors remain cautious. Several large companies have reported disappointing earnings this week. On the other hand, the S&P 500 has been rising in 79% of the May-October periods from 1990 to 2018. This means the S&P 500 will likely end the week with a gain of 1.9%. In contrast, the S&P 500 Consumer Staples sector is on pace for its lowest level since September 2008.
The Stock Market Forecast for the Week Ahead: As the Summer season begins, many investors will shift their focus from June to July. The economy is expected to slow slightly after the Labor Day holiday. But even if the Fed is more patient than expected, sluggish growth and sluggish demand are factors that could benefit stocks in the months of November and December.
Despite this, investors will continue to focus on value-oriented stocks and a cheaper market. This week, the Fed is expected to ease interest rates further and accelerate its taper, putting pressure on corporate profit margins and unwinding policies that were designed to address the aftermath of the Great Recession. However, if the Fed does slow its taper, the stock market will likely continue to rally into the end of the year.
Several signs of seasonality are already in play. In August, services outperformed manufacturing, and the MSCI Europe index is trading at the lowest level in its year-to-date range. In addition, the market has become more cautious in the fall, weighing on earnings forecasts. And with the summer in full swing, expectations for a stronger recovery may be reduced, but for now, there are signs of a seasonal slowdown.
Despite the uncertainty, the stock market remains cheap and largely priced. The S&P 500 has advanced nearly 9% this year, but its average weekly gains have been weaker in recent weeks. Historically, the S&P 500 has risen about 7% between October lows and year-end close. But the summer doldrums are a natural part of the market cycle.
The stock market continues to grow, but it has slowed down in recent weeks. The economy has been hit by a series of negative news stories. On Friday, a government report revealed that consumer confidence has dropped by more than half since the start of the year. As a result, the FTSE 100 has been one of the shakiest sectors for the past few years, and the upcoming midterm elections also pose a risk.
In addition to a summer-long correction, the summer-doldrums also make investing in Europe particularly risky. The yen is currently trading on 18 times its annual earnings, which is a very healthy level for an emerging market. Moreover, the Consumer Price Index is correlated with US bond yields, which suggests that the market is more expensive than it should be. This means that quality stocks are likely to outperform cheaply while cyclical stocks are more expensive.