Stock investors breathed a sigh of relief after the market ended August virtually unchanged. Despite dire warnings from a growing chorus of experts that equities were overdue for a correction, the S&P 500 Index (SPX) nonetheless eked out a tiny 0.05% gain. The low point for the month, reached during intraday trading on August 21, was only 2.1% below July's close, per Yahoo! Finance data. However, investors may face a rude awakening in September, according to historical data cited by Barron's.

Historical trends aside, the odds of a significant pullback are rising as stocks face potentially disruptive fiscal events, including fights over the debt ceiling and a possible federal government shutdown. That could happen in early October, but the possibility of a U.S. default already is rippling through the U.S. Treasury Bill market. (For more, see also: The 5 Biggest Risks Facing the Markets.)

Beware September

Since 1962, the S&P 500 Index has fallen an average of 0.67% in September, according to Jeff DeGraaf, head of Renaissance Macro Research, in a note to clients quoted by Barron's. Indeed, September is "the only month of the year that has statistically significant negative returns," he wrote. That 0.67% average decline in September is nearly 17 times the average percentage decline in May, twice the average decline in June and seven times August's average decline observed over the same time frame, per DeGraaf's calculations.

Valuation Worries

As of the market close on September 1, the trailing P/E ratio on the S&P 500 was 23.9 and the forward P/E was 18.9, according to analysis by Birinyi Associates reported by the Wall Street Journal. The forward P/E is at its highest level since 2004, and above its long-term average since 1982, per charts prepared by Yardeni Research Inc. Note that Yardeni's methodology produces a slightly lower forward P/E of 17.6.

Looking all the way back to 1871, Advisor Perspectives derives an average historical trailing P/E of about 16.7 for the market. That should be taken as only a rough guide, however, since compiling consistent data so far back in market history presents various methodological problems. In any case, Advisor Perspectives discounts the use of forward estimates, "because they are often based on wishful thinking, erroneous assumptions, and analyst bias."

Meanwhile, former Federal Reserve Chairman Alan Greenspan is worried about an overvalued bond market. When that bubble bursts, stock prices will plummet as well, he warns. (For more, see also: Stocks' Big Threat Is a Bond Collapse: Greenspan.)

Buffett Stays Invested

Despite sharing concerns about lofty valuations in the equity markets, billionaire investor Warren Buffett sees stocks as a much better alternative than bonds right now. Indeed, he is looking to put $80 billion of idle cash to work in stocks, if he can find the right opportunities at the right prices. (For more, see also: Buffett Says Aging Bull Market Best Place to Be.)

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