Here’s What September Has in Store for the Market
Well, it took long enough — nearly seven months, to be exact — but the S&P 500 huffed and it puffed and finally blew through its January record high of 2,872 last week.
Most other stock market benchmarks joined the party, including the Nasdaq and Russell 2000 small caps. Only the Dow Jones industrials still come up short.
Market breadth has likewise improved in recent weeks, with the NYSE and S&P 500 advance-decline lines also jumping to a new high. That's a bullish sign telling you the majority of stocks are moving higher along with the headline indexes.
Plus, I'm still sensing an unusually high level of pessimism among investors, both retail and professional alike, which from a contrarian point of view means the stock market can continue to trend higher in spite of hostile seasonal patterns as we move through September.
One thing is crystal clear: U.S. stocks are king of the hill by a widening margin, as you can see in the chart above.
The S&P 500 is now up more than 7% year to date, while all other global stock markets, excluding the U.S., are down 6.2% this year! This is mainly due to the dismal underperformance of emerging markets, down 8% as last week.
And which sector is king of the hill among U.S. stocks? You guessed it: technology!
The S&P 500 tech sector is up a whopping 15.55% year to date. That's TWICE the 7% gain of the S&P overall. In fact, if you black out the tech sector's blockbuster performance, the S&P would be up only 4% so far this year, as you can see below.
One concerning sign is the high level of concentration in the S&P 500 index of just a handful of tech stocks. Of course it's the usual suspects. Just FIVE stocks — Apple, Amazon, Facebook, Microsoft and Google — collectively account for over $4 trillion worth of the S&P's market capitalization.
That's more than the smallest 283 companies in the index combined. Some of these mega-cap names are clearly expensive. Amazon for instance trades at more than 70x its estimated earnings over the next 12 months.
So is this a bubble waiting to burst?
Not so fast. If you look at valuation metrics, the tech sector as a whole doesn't appear outrageously priced, trading at just 18.6x estimated earnings. That compares with a 16.6x P/E ratio for the S&P 500 overall.
So tech isn't really that expensive; it’s certainly nowhere close to the nosebleed valuations of 1999–2000 when the last tech bubble burst.
Value-conscious investors may simply rotate some of their money out of tech and into sectors with more attractive valuations. For instance, three sectors that were out of favor with investors not so long ago, health care (+5%), industrials (+3.25%) and consumer staples (+3%), are outperforming the technology sector (+0.4%) by a wide margin over the past month.
Here's to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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