The S&P 500’s 1 percent decline on Monday is a warning sign of steeper drops ahead regardless of whether the Federal Reserve raises interest rates, says Irwin Kellner, chief economist at MarketWatch.
"Investors should enjoy the good times while they are still around, for there are increasing signs that the party may soon be over,"
he writes. "The Federal Reserve has dropped more than a few hints that it is planning to take away the punch bowl," he said.
“Stocks face the future wedged between a rock and a hard place. If the Fed hikes interest rates, stocks will fall, fearing the loss of an important prop under prices as well as under the economy,” he said.
“On the other hand, if the Fed should decide not to raise rates at this time, stocks will also fall over concerns that the economy is too weak to take a hike in rates.”
The S&P 500 has risen 1 percent since the end of last year, putting the stock benchmark on track for the weakest performance since 2011. The Federal Reserve has hinted that it will raise its
target interest rate in December, the first hike since 2006, as the economy shows signs of healing from the Great Recession.
Stocks fell more than 10 percent in August from the May peak as China devalued the yuan, triggering investor fears that the world’s second-biggest economy was in trouble. The market rebounded in October as central banks worldwide discussed stimulus plans.
The bounce has made stocks expensive compared with their earnings, Kellner says.
“October was the best month for stocks in four years. As you might have expected, this has driven the market’s price-earnings ratio well above average,” Kellner says. “The current ratio for the Standard & Poor’s 500 stocks is a tad over 22; the average P/E ratio for these stocks since the 1870s is 16.6.”
Higher interest rates will boost demand for the U.S. dollar, making it more expensive than foreign currencies. That could hurt U.S. exports, while corporate profits earned in foreign countries will look smaller.
The stock market’s moves in the next few weeks will have a big effect on its direction in 2016, says Avi Gilburt, author of ElliottWaveTrader.net.
The S&P 500 stock index fell below key levels of 2,080 and 2,075 as of Monday, opening up the possibility it may decline further to 2,000 to 2,020,
he writes on MarketWatch.com.
“After the market broke out over the 2047 level on the SPX several weeks ago, and broke the immediate downside setup, it has struck each of our upside resistance targets just about to the penny for the last several weeks, fell back, but held support each time in order to continue to the next higher target we have noted on our charts,” Gilburt writes. “Whether this will continue to 2,328 is still an open question until we see the breakout over 2,142.”
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