Will Stocks Crash in October?

Yields and stocks flip-flopped again this morning as the market retested its recent lows. The major indexes opened down on the day before paring much of their initial losses shortly before noon. Tech, like on Tuesday, outperformed the rest of the field. Value stocks fell the most while bond yields continued climbing.

In the trading session prior, yields and stocks both rose simultaneously. Today, the market failed to provide a repeat performance.

Don’t forget that on Tuesday, Senators Joe Manchin and Krysten Sinema hinted that they were warming up to President Joe Biden’s newest stimulus proposal. Sinema and Manchin indicated previously that the multi-trillion-dollar bill was too costly.

Now, they’re starting to change their minds. This caused stocks to jump higher in response. After all, the post-Covid bull market has been driven almost entirely by government stimulus and the Federal Reserve via its persistent quantitative easing (QE). QE’s about to get slimmed down, though, once the Fed begins tapering asset purchases later this year.

And unless the two senators vote yes on Biden’s proposal, there won’t be additional government spending in the foreseeable future, either.

Stocks likely need at least one of those two bullish pillars if the market’s going to survive October without a significant downturn. Traders seemed to have realized this, as evidenced by the recent spike in volatility.

“Well, October is sure living up to its reputation as the most volatile month of the year. We expect the October roller-coaster market to stick around for a bit longer,” remarked LPL Financial’s Ryan Detrick.

Kristina Hooper, Invesco’s chief global market strategist, believes more
“ping-ponging” could occur before the month is finished.

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“It’s unclear what October holds. I have a big question market in my mind: Could it be the ugly sequel to September?” Hooper said.

“Certainly, what we’ve seen thus far is that any time there is a selloff, investors are quick to move in and find opportunities,” she added, acknowledging the market’s tendency to fill each monthly dip.

“I would assume that we’re likely to see more volatility going forward as we anticipate the Fed’s tapering announcement. And so that creates an announcement where investors can dollar-cost average on down days in areas where they would like to, and where they’re interested in adding exposure. This is probably not the only selloff we’ll see for October.”

In short: continue dip-buying until the Fed calls an end to the bull market.

Does that sound familiar? It’s the same stance we’ve maintained for months. We’ve also said that stocks face a grim conclusion when the tapering starts and the stimulus stops.

The US is rapidly approaching that point, at long last, after over a year of “uber-dovishness.”

What’s next is figuring out which asset classes are going to outperform the general market once the dust settles. If the recent consumer and producer price indexes are any indication, investors need to be prepared for a “stagflationary slump,” where economic demand stagnates while inflation surges. In that case, commodities and commodity-linked stocks would be the most likely overachievers. There’s a case to be made for crypto, too. Bitcoin, for example, crashed right alongside the S&P when Covid hit.

Since then, though, Bitcoin’s up over 1,200% from its Covid lows vs. the S&P’s 96% gain. That’s not to say we’ll see another rapid collapse when the Fed starts to officially taper, though.

It’s probably going to be a slow grind to the bottom instead. But, like always, dip-buying at the monthly lows should remain a valid strategy until the tapering starts.

Even with so much volatility emerging over the last few days.

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