As the stock market enters the last quarter of the year, investors are expected to stick with stocks. Not because they think stocks are a great deal. Rather, professional investors see no other game in town.
Many analysts repeatedly note that stocks are pricey in a world full of economic and geopolitical threats that could send investors running to the exits.
Though cautious, pros feel compelled to invest when they have money. And since bonds at low interest rates hold little appeal with rates likely to rise next year, the pros generally end up favoring stocks.
“We are still moderately positive on stocks although they are moderately expensive and the U.S. is quite expensive,” said Andrew Pease, strategist for Russell Investments.
His rationale for buying stocks is a common one: U.S. companies keep producing solid earnings, low interest rates make stocks relatively attractive compared with bonds, and central banks in Europe and Japan are busy stimulating the economy. That stimulus means there is a lot of money in the system. So pros feel compelled to invest rather than sit on cash.
In addition, although the stock market has been climbing for six years and could run out of steam after such a lengthy period, Pease is encouraged by the fact that there is “no over-exuberance” among investors for stocks now. Typically, bull — or climbing — markets end when investors don’t see risks and figure making money in the stock market is a no-brainer.
In the current market, pros are repeatedly noting potential risks and buying reluctantly after roughly a 7 percent gain in the Standard & Poor’s 500 this year.
Last week, the stock market moved in fits up and down by more than 100 points a day as investors debated whether it made sense to stick with stocks.
Concerns throughout the third quarter kept investors on guard, with the S&P gaining just 0.7 percent. Analysts expect volatility to continue, especially as they see signs that the Federal Reserve might be getting ready to let interest rates start moving upward in 2015. (Low rates allow companies to borrow money inexpensively. As rates rise, borrowing costs go up, making it more difficult to expand and grow profits.)
Citigroup bond strategist Hans Mikkelsen said in a recent report that markets are having an “uncertainty tantrum” over rates and the Fed’s coming moves. And Citigroup stock strategist Tobias Levkovich said that during the end of this year, investors should “experience some volatility with little overall appreciation (in the stock market) as investors digest possible future Federal Reserve actions” at the same time as corporate profits remain uncertain in a weakening global economy.
He anticipates that the S&P 500 will end this year at 2000, just a little over Tuesday’s 1972.29 close. By mid-2015, as the Federal Reserve starts to let interest rates rise, Levkovich thinks the S&P 500 will reach 2,100 and end the year at 2,200.
Goldman Sachs strategist David Kostin has estimated that the S&P 500 will rise 7 percent over the next year, to 2,150, with firms dependent on the strengthening U.S. economy doing better than those that typically sell heavily into Europe.
Pease said that if he was forced to choose now where to pick stocks, he’d favor Europe because stocks there aren’t as pricey as in the U.S.
But Europe is struggling.
Concerns over deflation have been building as growth has failed to materialize. Unemployment is at 11.5 percent and youth unemployment at 23.3 percent.
Some investors expect the European Central Bank to try to help the European economy by providing more stimulus when it meets Thursday. But economist Carl Weinberg, of High Frequency Economics, doesn’t expect it to work.
The problem is bank lending, Weinberg said.
“Banks aren’t lending,” he noted. “Many banks — perhaps most banks — need new capital to be able to lend more. The European Central Bank is powerless to help banks add new capital.”
While Europe struggles, investors are also concerned about slowing growth in China and emerging markets, where stocks have fallen about 9 percent since early September. Oil prices have also tumbled based on global growth concerns and a strengthening dollar.
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“The appetite for U.S. assets should expand,” said Carmine Grigoli, strategist with Mizuho Securities. “U.S. investments look increasingly attractive relative to other major industrial nations, corporations are generating record profits and economic growth is accelerating.”
Grigoli is expecting a lengthy period of strength in the U.S. dollar as the U.S. economy grows at 3 percent while the eurozone stagnates, Japan struggles to grow and China loses growth momentum.
The U.S. dollar index is up 8.3 percent since early May. Still, investors will be on guard when third-quarter earnings reports start in October, for signs that the dollar’s strength is interfering with profits of companies doing large amounts of international business.
“Companies with large international exposures are at risk of suffering from double blows,” from the stronger dollar and further deterioration in major economies abroad, Grigoli said.
Twitter @gailmarksjarvis