October 2022 Stock Market Outlook – Forbes Advisor

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settlement in usa. uu. the stock market rallied in september, completely wiping out all 2021 gains from the s&p 500.

The S&P 500 was firmly in bear market territory at the end of September, down almost 24% for the year, the lowest level since November 2020.

Reading: Where is the stock market heading

At this point, investors have become accustomed to temporary bear market rallies followed by even more severe losses. almost half of the trading days have seen the s&p 500 rise or fall more than 1%, indicating a higher level of volatility.

During the middle of the month, the s&p 500 index plunged more than 13% over the course of 10 days, in a drop that might have felt shocking under more normal conditions. but these are not normal times for the markets.

Unsurprisingly, inflation remains the tail that wags the dog in the markets. but something has changed, and it largely comes down to perception.

Consider how the Fed’s stance on inflation has evolved.

Last year, federal officials said inflation would not be a problem. later, the federal promised that it would be “temporary”. they went on to launch a “soft landing” for the economy even as they raised rates and now warned of more economic pain to come as they do whatever it takes to rein in inflation.

Market participants have been slow to catch up to the party line, and that’s reflected in the wild volatility, says david schassler, director of quantitative investment solutions at vaneck. “The market hasn’t recognized the threat of inflation,” says Schassler.

runaway inflation will not die out in October and there will be no federal meeting until November. still, october should provide valuable clues about the pace of growth and whether the fed’s aggressive strategy will push the us. uu. economy in recession.

inflation: the tail that wags the dog

September’s market performance was a wake-up call for many investors, especially when the consumer price index (CPI) report for August showed that inflation had not peaked.

many market participants became convinced that price gains had already leveled off. His surprise was clear enough: On the day the August CPI data dropped, the S&P 500 plunged 4.5%, its worst single-session drop since June 2020.

According to cliff hodge, chief investment officer at cornerstone wealth, investors can expect similar volatility around the release of monthly inflation readings in October, “inflation is still the most important thing,” he says.

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the september cpi report is scheduled to be published on october 1st. on October 13, while the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, is due for release on October 1. 28.

schassler will look at “the most persistent forms of inflation,” such as food and house prices, in the next cpi report.

While one month’s worth of data isn’t likely to change the needle significantly, he says this report is no. 1 focuses on wall street as consumer inflation drives interest rates, the Fed’s policy response, and the knock-on effect on markets and the economy.

Still, high inflation is unlikely to slow significantly, let alone return to the Fed’s target of a 2% rate anytime soon, schassler warns.

“Unfortunately, we think the idea of ​​a soft landing is a fairy tale, and investors can expect a lot more volatility,” he says.

Rhetoric from fed policymakers will continue to rattle markets in the coming months. If the Fed finally backs away from its aggressive rate-hike strategy, it will do so in the face of still-high inflation. “When the feds say to prepare for the pain, we should believe them,” says schassler.

But the biggest risk for investors is the possibility of a recession, or at least a slowdown in the pace of economic growth, in 2023, and that has yet to be fully priced into the market, Hodge says.

“Inflation is becoming yesterday’s problem. everyone is angry and worried about inflation, and we expect it to continue to be volatile,” says hodge. “The most important thing in the fourth quarter will be everything that comes out around economic growth.”

watch out for earnings season

The good news for growth-minded investors like Hodge is the wealth of information to explore in the coming months. That’s because earnings season, when publicly traded companies report their quarterly results, starts in the middle of the month.

“October should be pretty eye-opening from an earnings perspective,” says hodge.

The quarterly earnings reports that companies release in the coming weeks will be crucial. Investors will focus less on past results and more on what companies have to say about their prospects for the rest of the year and next, says Michael Sheldon, CEO and Chief Investment Officer of RDM Financial Group.

“A risk to markets is that given the slowing economy, corporate earnings prospects for 2023 look too high and will have to be lowered,” says Sheldon.

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That idea of ​​readjusting expectations should be a key theme, as some sectors of the financial markets indicate a consensus of “a fairly resilient economy next year”. but hodge says that may be too optimistic.

hodge is paying more attention to leading growth indicators, especially two reports due in the first week of october from the institute of supply management (ism). The Institute’s Manufacturing PMI and Service PMI reports will provide valuable information.

While “fixed” data, including the weekly jobless claims report on how many Americans receive jobless benefits, still point to a strong economy, Hodge wants to identify any signs of weakness in leading indicators and slowdown in the real estate activity is an important example.

Even with the S&P 500 in a bear market, Hodge’s concern is that a material slowdown in the pace of economic growth has yet to be priced into stocks and there will be more volatility as that happens.

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how to invest in october

Investors seeking relief from this year’s volatility will have to wait. “October, like September, has a reputation for above-average volatility,” Sheldon notes.

While the Fed remains committed to curbing inflation, that job remains complete and the midterm elections are fast approaching, which Sheldon believes will also impact financial markets in October.

“Ultimately, this bear market is likely to come to an end as investors price in future downside risks and then begin to shift their focus from Fed tightening and weak economic growth to tighter monetary policy. more accommodative, stronger economic growth and a rebound in corporate profits,” he says

Until then, however, the market will remain challenging for investors.

“no one knows for sure the future path of inflation,” says schassler. “This leaves investors in a very vulnerable place because stocks and bonds are being attacked by the same force: inflation.”

Current dynamics make a good case for diversifying your portfolio away from stocks and bonds into those assets that will act as hedges, schassler recommends. he cautions that investors might want to consider devoting 10% to 15% of their portfolio to “real assets,” including commodities and natural resource stocks. “The conversation is really about diversification.”

However, any changes to your portfolio should not come at the expense of your long-term investment strategy. A case can be made for bonds, as inflation will eventually decline and the pace of economic growth will likely slow, as expected, advises Hodge.

“We are becoming more bullish on simple bonds,” he says. “do not abandon your bonds.”

Category: Stocks

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