Will stocks continue rallying for the remainder of the year? As with many things, the late baseball genius Yogi Berra summed it up well: “It’s tough to make predictions, especially about the future.”
Anyone who has tried to forecast the stock market knows that investing is no exception: It often makes fools of otherwise smart people.
However, we know that stocks face some headwinds, so a continuation of the gains seen through July looks unlikely. Instead, expect shares to tread water or fall, at least for a while.
[See: The Fastest Ways to Lose All Your Money in the Stock Market.]
The Standard & Poor’s 500 index gained 9 percent excluding dividends since Jan 1. The SPDR S&P 500 (ticker: SPY) exchange-traded fund, which tracks the same index, performed similarly. It has annual expenses of 0.1 percent, or $10 per $10,000 invested.
So what is stopping stocks reaching higher levels?
Valuations are sky-high. The most important thing is that stocks are at record-high valuations, says Stephen Wood, chief market strategist at Russell Investments in New York.
The cyclically adjusted price-earnings ratio, which is a measure of how much investors are willing to pay for stocks, is now at levels not seen since before the crash of 1929 or before the tech bubble around the year 2000, according to website Mutpl.com. Both periods were followed by steep market drops.
Earnings and taxes. “Earnings comparisons will be harder to beat in the third and fourth quarter,” says Ernie Cecilia, chief investment officer of Bryn Mawr Trust, in Bryn Mawr, Pennsylvania.
Investors are focused on whether the latest financial results are better than the same period a year before. Companies had a helping hand in the first half because the same period in 2016 was hit by a plunge in commodities prices. Hence, the earnings comparisons were easier to beat than they likely will be in the second half.
Investors got excited earlier this year on the prospect of U.S. tax reform, Cecilia says. It hasn’t happened yet and he sees nothing solid happening until early 2018. Both parties need to collaborate to truly reform the rules, but “based on history that’s tough,” he says.
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The Federal Reserve’s role. The Federal Reserve is expected to start winding down its enormous bond buying program in September. It bought the bonds to keep the cost of borrowing low and to help spur economic growth. Cecilia says the unwinding could mean that interest rates will rise and so hurt the stock market.
Not everyone is so pessimistic. “We know that the Fed is sensitive [to market sentiment] and they don’t want to take action that will jeopardize the support they have given to the economy,” says Sinead Colton, head of investment strategy for Mellon Capital in San Francisco.
The bottom line. Expect the “market to move sideways to down but not necessarily evenly,” Cecilia says. That means that some stocks could fall a lot while others do little or nothing.
What could change the somber outlook is a surge in economic growth. More activity usually means bigger profits and hence higher earnings per share, which is something investors like to see.
Lately, U.S. GDP growth has been less than robust, limping along at around the 2 percent a year level in real or inflation-adjusted terms, according to government data. The first estimate of second quarter GDP growth was 2.6 percent, up from 1.2 percent in the prior month, both are weak readings based on history.
If you happily invested in stocks at a level where the swings up and down don’t worry you, then you need do nothing. As stock market pros often remind us, investing works best over long stretches of time.
But if you think your portfolio is too heavily weighted to bonds and cash, this may be a good time to rebalance your assets, and put a larger percentage of your portfolio toward equities.
One of the best ways to do this is dollar-cost averaging. Decide how much you want to reallocate and divide it into four chunks over four months. Hedging your trades in this way means you won’t get the best price possible for your investments, but you won’t get the worst price either.
[See: Buy and Hold: Be an Investing Expert Like Warren Buffett.]
And if you have such a big allocation to stocks that a drop in the market would make you lose sleep then consider reducing those holdings. As with increasing a position, you should reduce your position in stages over a period of time.
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The Outlook for Stocks for the Rest of 2017 originally appeared on usnews.com
