The stock market could have a stormy September, but you can weather the storm better by buying higher-quality stocks.
Historically, September is the worst month of the year for stocks. This year, the markets started to deteriorate in late August. The
S&P 500
is trading below its 50-day moving average, an indication that the market could be poised for further declines.
The S&P 500 and Dow Jones Industrial finished August down just over 4%, while the Nasdaq Composite ended just over 4.6% lower. Driving the losses: Federal Reserve Chairman Jerome Powell said at the annual Jackson Hole symposium that the Fed intends to raise interest rates quickly rather than slow the pace of those hikes. Translation: The central bank is prioritizing fighting inflation at the expense of economic growth, which is why markets are spooked.
Even after the market drops in August, September usually brings more drops. Dating back to 1928, the S&P 500 is down 0.6% on average in September after falling in August, while the Dow is down 0.3% and the Nasdaq is down 1%, according to Dow Jones Market data.
For all of September, the S&P 500 is down 1% on average, worse than the years-long average when August is a down month. The market is certainly hoping this time that the index has largely broken out of its decline this August. But if the Fed continues to raise interest rates aggressively, stocks could remain under pressure.
Stocks may need some good news to pull them out of their rut. Traders are hoping Friday’s jobs report will be cooler than expected, which will reduce pressure on the Fed to raise interest rates so quickly.
Whatever happens in the broader market, investors can protect themselves by buying higher-quality stocks. These often have relatively stable profit streams, even when economic demand declines. When recession risk rises, high-quality names tend to outperform lower-quality names, writes Keith Parker.
UBS
general.
Parker’s list of stocks focused on those that expect solid sales growth and that UBS analysts expect to post double-digit share price gains.
Microsoft ( MSFT ) is on the list, with expected sales growth of 13% for fiscal 2023, according to FactSet. UBS analysts have a $330 price target on the stock, which represents 26% upside from its current level.
Coca-Cola ( KO ) is expected to increase sales in 2023 by 3.7%. UBS analysts have a $72 price target on the shares, suggesting upside of 15%.
Cigna ( CI ) is expected to grow 2023 sales by 5%, and UBS analysts have a $330 price target on the stock, representing 16% upside.
Maybe it’s time to cover up. These stocks could provide ballast for the portfolio.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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