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Wall Street Week Ahead A resounding US equity rally is ahead of the toughest month in the market

The US flag can be seen on a building on Wall Street in the financial district in New York, the United States, on November 24, 2020. REUTERS / Brendan McDermid

NEW YORK, Aug 27 (Reuters) – A rally in which US stocks doubled from post-pandemic lows is about to enter the worst month of the year for stocks as investors look to a nationwide COVID 19 resurgence focus and how soon the Federal Reserve plans to withdraw its easy money policy.

September was the worst month of the year for the S&P 500 (.SPX), with the benchmark index falling an average of 0.56% since 1945, according to Sam Stovall, chief investment strategist at CFRA. The S&P rose 45% of the time in September, the lowest of any month, data from CFRA showed.

This time around, stocks have momentum on their side. The S&P 500 hit its 52nd record closing high of the year on Friday and is up 20% so far in 2021 after having passed 287 calendar days without a 5% or more retreat.

This type of performance has signaled comparatively strong returns in the past. The index posted a median gain of 5.2% for the remainder of the year in the years it hit 30 new highs through August, according to data from LPL Financial. This contrasts with an average growth of 3.6% for all years, as the company’s data showed.

Reuters graphic

A speech by Fed chairman Jerome Powell on Friday helped allay concerns that the central bank was making monthly purchases of 120 billion Read more

Still, signs of caution have increased in some corners of the market, fueled in part by rising coronavirus cases across the country and uncertainty about how quickly the Fed will tighten monetary policy once it begins tightening.

With concerns about the Delta variant looming, “it makes sense to keep questioning the rally because of the seasonality,” said JJ Kinahan, chief market strategist at TD Ameritrade.

With major indices near new highs, many stocks have been left behind. On Tuesday, the S&P 500 hit a closing high for the first time in nearly seven years, while a 10-day total showed more stocks on the New York Stock Exchange and Nasdaq hitting 52-week lows than 52-week highs, respectively Willie Delwiche, an investment strategist with research firm All Star Charts.

Investors have also reduced leverage, with margin debt falling 4.3% to $ 844 billion in July, despite the S&P rising more than 2%, according to data from BofA Global Research. The S&P 500 was down 71% of the time a year after its margin debt peaked, the bank’s analysis found.

According to a report by Goldman Sachs, net debt among hedge funds was 50% at the beginning of the third quarter, compared to 58% at the end of last year.

Although the market’s gains have been spectacular since the start of the year, investors wondered how much juice was left in the rally. A Reuters poll this week showed that strategists think the S&P 500 is unlikely to be far from its current levels in 2021. Continue reading

Insight into the economic impact of the Delta option will come next Friday with the release of the US employment report for August following the latest weak readings on consumer sentiment and retail sales. The seven-day average of newly reported cases hit about 155,000, its highest level in about seven months, Reuters data showed through Thursday.

“If I go through the noise … that’s what the market is really focused on right now,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.

Still, there is a lot of support for the view that stocks are likely to slide further through the year end.

Corporate buybacks reached their highest level since mid-March last week, a potential source of support for stocks, according to BofA Securities. These were led by financial stocks, which posted their highest weekly buybacks since 2010, the BofA wrote.

“Despite the noticeable increase in Covid variants, we believe the economy will continue to chug,” said Rick Rieder, Chief Investment Officer for global bonds at BlackRock, in a statement to investors on Friday.

Some investors are still ready to jump on downturns from higher volatility in the coming weeks.

“If we see a pullback in September, I would definitely say to our customers, ‘Take this as an opportunity to buy,'” said Janasiewicz.

Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed in New York Additional reporting by Ira Iosebashvili in New York Editing by Ira Iosebashvili and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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