NEW YORK, Nov 23 (Reuters) – Stock market investors are bracing for a tumultuous year-end due to uncertainty over the Federal Reserve’s short-term interest rate cuts and growing concerns that the artificial intelligence companies that drove the market to new records this year may be overvalued.
sign up here.
After a relentless rally since April, driven by AI excitement and interest rate cut expectations, the market’s exuberance has given way to caution this week, with investors warning of more disruption heading into the holiday season as doubts about these two key themes rise.
“We’re definitely approaching what’s going to be a volatile holiday season,” said Eric Kuby, chief investment officer at North Star Investment Management in Chicago.
“Without a rate cut…and new fears unfolding, it looks like we’re going to have a much more difficult holiday season than we previously expected.”
Volatility is expected to continue
The VIX futures curve, a snapshot of volatility expectations over the coming months, is also unusually flat, indicating the market expects volatility to persist.
Still, many investors say the rebound was premature after the S&P 500 index soared 38% from its year-to-date low in April through the end of October. Thursday’s selloff left the index down 5% from its October high and the first 5% decline in 149 days, said Keith Lerner, chief investment officer at Turist Advisory Services. By contrast, since 2010, the average time between a decline of at least 5% has been 77 days, Lerner said.
The S&P 500’s price-to-earnings ratio, based on earnings estimates for the next 12 months, was 21.8 times as of Thursday, down from 23.5 times about a month ago, according to LSEG Datastream. However, the current valuation is still well above the 10-year average of 18.8.
“We’re resetting those high expectations,” Lerner said. “We probably need to go a little further in terms of people having more questions and uncertainties.”
“While we do not see retail investors contributing to the decline, we also do not see strong interest in buying on the spur of the moment,” JPMorgan analysts said in a note Thursday.
Uncertainty about Fed rate cuts
The key uncertainty set in the dog market over the coming days is whether the Fed will cut interest rates at its December 9th and 10th meeting, which until late last month appeared to be done.
“It’s very likely that the overall picture won’t change until the Fed is clearly in rate-cutting mode again,” said Yunyu Ma, chief investment strategist at PNC Financial Services Group. “It will happen sooner or later, but it may not happen before the end of the year.”
“I can see investors being a little bit more cautious. I think we need to rally here,” said Don Nesbitt, senior portfolio manager at F/m Investments.
potential opportunity
Stocks typically end the year strong, and some investors say there may still be reason for year-end cheer. December ranks as the third-best performing month of the year, with the S&P 500 index gaining an average of 1.28% since 1928, according to LSEG data.
Post-World War II data tracked by Sam Stovall, chief investment strategist at CFRA, shows that for every dip in November, historically the best month, December performed even better. In these cases, December saw an increase nearly double the historical average.
Some investors said they see an opportunity. Nesbitt had been underweight the information technology sector due to rising valuations, but said it was “starting to look a little bit more attractive.”
Jack Ablin, chief investment officer at Kusett Capital, said investors are often reluctant to sell winning stocks in December to avoid paying taxes on capital gains.
“I don’t think investors want to run away from the market,” Ablin said. “What they really want to do is dig in and find opportunities.”
Report by Lewis Krauskopf. Editing: Richard Chan
Our standards: Thomson Reuters Trust Principles.
