Maybe this year is already over
Defensive tilt of trading suggests some investors are trying to hang on to gains.
Since taking a 10% header in early August, the market recouped much of its gains, even aside from Tuesday’s slump for the S&P 500.
But astute observers have noted the tentative tone of traders as we head toward 2024’s home stretch.
Goldman Sachs analysts pointed out this week that so-called safe haven assets — investments like US government bonds, the Japanese yen, and the Swiss franc, where cash is often stashed for safe-keeping rather than for returns — have been outperforming riskier investments like stocks since mid-July.
And even within the US stock market itself, defensive shares, essentially companies that have proven they can do better than most during periods of economic weakness, have been outpacing the market since the S&P 500 peaked.
Surveying the next few months, there are solid reasons one might try to lock in this year’s respectable ~17% gains right now.
For one thing, as Luke wrote last week, there still seem to be some jitters about the economy out there.
And it’s hard to argue that stocks look like an especially good bargain with forward price-to-earnings ratios at 21, near some of the highest levels we’ve seen in the last 30 years.
Meanwhile, the presidential election stands to get noisier until November, adding a level of uncertainty — especially around potential changes to the American corporate and personal tax regime over the next few years — that won’t be resolved until the votes are counted.
Yes, there are Fed rate cuts clearly coming. But that’s all been priced in and then some. Pricing derived from the Fed funds futures market now expects a full percentage point of cuts between now and year-end, according to data from the CME’s FedWatch tool.
Those expectations could be frustrated if the economy continues to chug along at a 3% growth rate as it did in Q2, and the job market holds up.
That could be a headwind for the market — or not. Stocks did well in the first quarter even as traders curbed their expectations for rate cuts in the face of solid economic data. Of course, that reached a brief breaking point in April, as a string of hot inflation reports caused traders to question if any easing at all would be delivered in the near term.
Of course, nobody knows where the markets are going. And as Yiwen just pointed out, we could simply be at the onset of a typical September slump. But the safety-first tone of trading seems worth keeping an eye on.
