While it’s extremely difficult to predict a stock market pullback, there are certainly harbingers that the market could be in for a rough ride over the coming month. The September-October period ahead of U.S. mid-term elections is historically a volatile one. In fact, Cantor Fitzgerald notes that the S&P 500 index has fallen by 5% or more during these two months in 15 of the past 24 midterm election cycles.
At the same time, two major market valuation indicators point to stocks being at extremely frothy valuations. The S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio is at over 40 times for the first time since before the dot.com market crash. The so-called Buffett indicator (U.S. stock market value divided by gross domestic product), named after Warren Buffett, is over 230%, well above the 120% where the market is considered overvalued. Throw in a war and a stressed consumer, and the ingredients for a market pullback are there.
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There is no guarantee of a big market dip, and even if there were one, I wouldn’t panic. Instead, I’d view it as a strong buying opportunity. AI has changed the equation, leading to big productivity gains that are just beginning, and stocks are generally cheap on a forward basis. The market today is very different than in the past. The S&P 500 is no longer led by cyclical and financial companies. Instead, it’s dominated by large tech companies with strong balance sheets that produce enormous operating cash flow.
Let’s look at five exchange-traded funds (ETFs) to scoop up if the market dips in the coming month.
The Vanguard S&P 500 ETF
If I could only invest in one ETF, I’d choose the Vanguard 500 ETF (NYSEMKT: VOO), or a similar fund that tracks the S&P 500. This ETF gives investors a portfolio of 500 of the largest U.S. companies weighted by market cap, which means the larger a company becomes, the more effect it has on the ETF’s performance.
The ETF has a strong track record, and only 14% of actively managed large-cap funds have been able to outperform it over the past decade. The ETF has produced an average yearly return of 15.3% over the last 10 years and 22% over the past three.
The Vanguard Morningstar Growth ETF and Invesco QQQ Trust
While value stocks are actually outperforming this year, growth stocks have led the charge for much of the past decade. Two great growth index ETFs are the Vanguard Morningstar Growth ETF (NYSEMKT: VUG) and Invesco QQQ Trust (NASDAQ: QQQ). The Vanguard ETF basically tracks the growth side of the S&P 500, while the Invesco QQQ mimics the Nasdaq-100 index. Both ETFs have over 65% of their portfolios in tech stocks.
