The forecast for the market is murky at best – and there are no meatballs involved. Questions about the economy’s strength, the Federal Reserve’s next plans and even corporate earnings trends won’t be answered for months, leaving investors feeling like they’re walking on quicksand after gaining certainty. It’s a good time to buy stocks anyway.
The reasons for optimism begin with a just-ended September that lived up to its reputation as the toughest period of the year for equity investors. The S&P 500 index, which fell 0.74% last week, ended the month down 4.87%, its worst month since December, while the Dow Jones Industrial Average fell 1.34% and ended the month with a loss of 3.50%. The Nasdaq Composite fell 5.81% in September after rising 0.06% last week.
There was a lot that I didn’t like last month. In those 30 days, stock investors had to contend with a Fed “hawkish pause,” an impending government shutdown, a rise in bond yields, and rising oil prices. Not surprisingly, only 27.8% of respondents to the American Association of Individual Investors’ sentiment survey described themselves as optimistic – the lowest level in four months.
But even as the days get darker in October, the market mood should become sunnier. The simplest argument for a short-term upswing in the stock market is simple mean reversion. “One-month periods in which stocks do nothing but fall have typically seen a rebound effect in the subsequent period,” analysts at Bespoke Investment Group wrote last week.
The data backs it up. In the first 20 trading days of this September, the S&P 500 reached an intraday low below the previous day’s intraday low 15 times, including nine straight days of selling pressure. There had been so many lower low days in such a short period of time only 14 times since 1993 before this September – and according to Bespoke, three months later the index was higher 79% of the time, by an average of 8.1%.
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The S&P 500 also found support around 4,300 last week, as it did during the declines in June and August, before closing at 4,288. And even if this level is broken, the next one is not far away – it can be reached at 4288. The 200-day moving average is near 4200. All other things being equal, market technicians would expect these levels to remain in place.
On the fundamentals front, third-quarter earnings season begins October 13, when JPMorgan Chase (ticker: JPM) and other major banks report. Analysts expect S&P 500 earnings per share to rise 2% year over year, albeit after three straight quarters of negative or no growth. Not bad results would help keep expectations of 12% earnings growth for 2024 high.
As for all the worries out there, they’ve just created a new wall of worry for stocks to climb – one that shouldn’t prove insurmountable. With the Fed not meeting again until November, there will be a news vacuum on the monetary policy front for several weeks. Congressional dysfunction can lead to a government shutdown, although this is a bigger problem for the country than for the stock market. And we can fret about 2024 as it approaches.
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Remember: As the calendar turns to October, stocks also move from a seasonally weak time of year to one that has historically been one of the best – with the final months of the year seen in a “Santa Claus rally.” December peak.
However, you don’t have to believe in Santa Claus to believe that the path of least resistance seems to lead up and to the right.
Write to Nicholas Jasinski at [email protected]