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Fed-Induced Stock P/E Gains Seen Ending Soon: Chart of the Day

U.S. stocks may have little more to gain from the Federal Reserve’s third round of bond buying even though the purchases have only begun, according to Gina Martin Adams, a Wells Fargo & Co. strategist.

As the CHART OF THE DAY depicts, the Standard & Poor’s 500 Index’s price-earnings ratio since June has tracked an expansion that started in August 2010, when Fed Chairman Ben S. Bernanke foreshadowed the prior round of so-called quantitative easing with a speech in Jackson Hole, Wyoming. The P/E might be about a month away from peaking, assuming the pattern holds.

“Over the last four years, investors have become accustomed to one consistency in the equity market -- when the Fed moves, stocks follow,” Martin Adams wrote two days ago in a report featuring a similar chart. “Investors may have priced in a new round of liquidity before it happened this time.”

Fed policy makers announced a plan on Sept. 13 for the central bank to buy $40 billion of mortgage-backed securities each month. The purchases will persist as long as the labor market doesn’t “improve substantially,” according to a statement they released that day.

The S&P 500’s higher valuation bolsters the argument for buying defensive stocks, or shares of companies that are least affected by economic swings, Martin Adams wrote. The New York-based strategist favors investing in companies that sell food, beverages and other consumer staples, along with health care.

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