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

Oct. 17 (Bloomberg) -- 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.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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