Should you own equities in September?

The worst month for equities is fast approaching, posing a big question for investors. Lee Wild discusses the issues and reports on one analyst's view on what you should do.

This summer has been one to miss for many investors. The S&P 500 may have hit a record high in recent days, but London is trapped in a tight range, with strong arguments for a break out in either direction.

Optimists will have cheered as the current bull market beat the 1990-2000 rally to become the longest ever. Profits have jumped by 25% year-on-year for two consecutive quarters now, and more companies beat second-quarter earnings expectations - 81% - than at any time since data tracking began 20 years ago.

"Bull markets don't die of old age, and there are few signs of either imminent recession or an acceleration in the pace of Federal Reserve tightening that could bring an end to the rally in the near term,"

writes broker UBS. 

Valuations are not overly stretched either, it adds, pointing out that US stocks currently trade on a trailing price-to-earnings (PE) multiple of 19, which is only 3% above the 20-year average. 

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However, backing a further extension of this bull market is not without risk and, according to the Stock Market Almanac, September is statistically the worst month of the year for equities.

Biggest threat of all right now is Donald Trump's determination to hit the Chinese with higher tariffs, threatening an all-out trade war with its closest economic rival.

"We still expect the US to impose tariffs on $200 billion of Chinese imports, with rates of between 10% and 25% most likely," says UBS. "That is expected to hamper US growth and could weaken investor sentiment as the boost from last year's tax cuts start to fade."

The Federal Reserve has also warned of risks to corporate investment and hiring and of "significant negative effects on economic growth" if the dispute is not resolved soon.

Emerging markets are causing concern, too. Turkey has already sparked a short-lived sell-off across equity markets, a strong dollar and tightening US rate cycle could put further pressure on emerging economies that ruins risk appetite.

UBS analysts also believe Italy, and the new government’s fiscal plans, could pose problems this autumn as the risk of rising tensions with the eurozone remains. 

Source: Sharepad          Prices as at 28 August 2018

"From a strategic perspective, we believe investors should remain positioned in equities," argues UBS. "Global economic and earnings growth remains strong and we do not see an imminent end to the upswing in the business cycle."

However, tactically, analysts there are "broadly neutral on risk while we await greater clarity on the outcome of the trade dispute".