Submitted by Joel Laceda as part of our contributors program.
As the market continues moving higher, increasingly more investors are becoming nervous. Some of you have missed the rally completely, while others are unsure and confused about what to do now.
At this point, I would certainly recommend taking some profits and raising cash ahead of what I see as several factors that could cause the stock market to selloff significantly this fall.
Calling a market top or bottom is impossible, but what we’re trying to do here at BehindWallStreet.com is provide information that can help you adjust your asset allocation strategy so that your portfolio is properly positioned to take advantage of the market.
This means that, generally speaking, you want to buy an investment when others are selling and take profits when others are buying.
Here are five reasons that I’m worried that the stock market could be hit with a considerable sell-off this fall.
1) September is the Worst Month for the Stock Market
This should be no secret to long-term investors. According to the Stock Trader’s Almanac, the average return for the S&P 500 is ?0.52% during the month of September, since 1971.
This is by far the worst month for the stock market, and this alone should have you slightly concerned considering how high the current stock market is.
Seasonality is difficult to explain in one overriding generality. Meaning, while every year there might be a different reason for weakness, the comment trait is that September seems to be far weaker than any other month.
2) Federal Reserve will Most Likely Change Monetary Policy
I believe that the Federal Reserve will begin to reduce their $85 billion per month asset purchase program this fall, with my estimate that the announcement will come during the September meeting.
While some investors believe that the market has already priced in this action, I believe there will be far greater volatility than most people expect. We are looking at the beginning of a significant change in monetary policy.
In my opinion, professional investors won’t simply incorporate one month’s worth of reduction, but will extrapolate out 12-16 months, causing many large institutions to take profits and create selling pressure.
3) Budget Debate
Yes, it’s that time again, the budget debate. We have not solved our federal budget issues, nor are we likely to. It seems that every time politicians in Washington take center stage, the attention focuses on their pathetic leadership ability, and investors occasionally panic and sell.
While I don’t know the final outcome anymore than you do, I am worried whenever I have to rely on politicians to make decisions. In either case, having more political rhetoric on TV is a negative, not a positive for the markets.
4) Revenues are Flat, Earnings Growth Appears to be Stagnating
Looking at this past financial reporting season, it’s apparent that revenues are generally flat. Companies are having a difficult time in increasing topline revenue growth. While earnings growth is still positive, this to appears to be stagnating.
Much of the earnings growth over the past few years has come from cost cutting. At some point, you’ve cut all the costs possible and now need to increase revenue. We are simply not seeing that occur.