After the rout of September, sorry to break this to you, but stock markets historically have experienced well-above-average volatility in October. It’s often a spooky month for stocks and several of the greatest crashes in stock market history have occurred during the month, including ‘Black Tuesday’ and ‘Black Thursday’ in 1929, as well as ‘Black Monday’ in 1987 and the worst of the 2008 financial crisis meltdown. Some have dubbed this the ‘October Effect’.
Guggenheim Securities Chief Investment Officer Scott Minerd said that he expects stocks to fall another 20% by mid-October, citing a connection between price-to-earnings ratios and inflation. “We should see stocks fall another 20% by mid-October…if historical seasonals mean anything,” Minerd said in a tweet.
The Fed has already raised its benchmark interest rate by 300 basis points this year as it fights to bring inflation back under control. And more hikes are expected. We will get more data of course, during the month, but one to watch is the feedback loop between U.S. stocks and bonds.
With the S&P 500 is down more than 20% on the year and showing no signs of hitting a floor, remember the valuation for the index remains elevated, and earnings estimates have only started to turn lower and may fall further as earnings season nears. Additionally, high yield spreads are widening, and volatility measures show that investors’ mood is complacent.
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