JP Morgan Says Stock Market Expensive: 5 Strong Buy Safe Dividend Stocks

"Markets often rally in anticipation of rate cuts but then decline when those cuts are implemented. J.P. Morgan's trading desk recently warned that despite stocks setting "more than 20 all-time highs this year," the Federal Reserve's next rate cut threatens to curb investor zeal through a potential sell-the-news drop. Sure enough, as soon as the Federal Reserve cut the federal funds rate by 25 basis points, the market promptly sold off for the next three days."

"With the Nasdaq up more than 16% this year and the S&P 500 over 12% higher, on the back of two years of 20% gains, Gabriela Santos, the chief market strategist at J.P. Morgan's asset management branch, stated that investors may want to "lower their expectations" regarding future returns. She also noted that, at 23 times earnings, the market is the most expensive in 20 years."

"As the market is trading at the highs post the Fed cut, we think it is prudent to take some chips off the table and consider hedges. With implied volatility at historical lows, one can replace upside exposure with a leveraged options structure to achieve asymmetric payouts if the market overshoots to the upside, while risking very little should a correction occur."

Markets can rally ahead of expected interest-rate cuts and then fall once cuts are implemented, as a 25 basis point federal funds rate reduction prompted a three-day market sell-off. Major indexes have climbed substantially—Nasdaq roughly 16% and the S&P 500 about 12% year-to-date following two prior years of large gains—leaving valuations elevated near 23 times earnings, the highest in two decades. Market strategists recommend lowering return expectations, taking some profits, and implementing hedges. With implied volatility low, leveraged option structures can offer asymmetric upside with limited downside risk, while conservative investors can favor dividend-paying, total-return stocks.

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