October Stock Market Outlook: Is The S&P 500 Ripe For A Correction?

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After seven months of gains, the U.S. stock market finally satisfied its skeptics by declining in September. The S&P 500 tumbled 4.8%, notching its worst month since March 2020. The Dow Jones Industrial Average (DJIA) and Nasdaq Composite posted their weakest monthly showings in 2021 date.

In short, the market that seemed impervious to bad news finally showed it’s not.

The catalysts for the sell-off range from the China Evergrande crisis, surging Covid-19 delta variant cases, higher inflation, supply chain worries and the Federal Reserve’s plans to buy fewer bonds in the months ahead. While the bears may feel vindicated, the market’s bulls point to an S&P 500 that’s still up nearly 16% on the year.

There are plenty of reasons for both camps to believe they’re right about the market, especially with earnings season kicking off mid-month. Greg Bassuk, chief executive officer of AXS Investments, typically tracks two to three big factors that could dictate the market’s ups and downs in any given month, but he’s watching five factors in October—a telling sign of how investors are trying to make sense of everything going on right now.

“The million-dollar question is what does this mean for investors and what do investors do about it,” says Bassuk. “We definitely see the likelihood of higher volatility.”

Volatility could also prove to be pivotal in determining the market’s direction—and whether the selloff that began in September could worsen to become a full-blown market correction.

From Economic Indicators to Covid and More

With so much to monitor in the market, that’s likely to make for an interesting month ahead. Here are the five factors Bassuk will be watching in October:

  1. Earnings season. Companies will begin reporting earnings for the third quarter in mid-October, and market participants will have an opportunity to look under the hood for specific companies, learn about the outlook into 2022 and get a broader sense of what’s happening in the economy. “This particular earnings season is going to be pretty important to give us visibility into what Corporate America is thinking about the whole recovery,” Bassuk says.
  2. Economic indicators. While economic data reports are always important, investors will be looking at how the rise in delta variant Covid-19 cases has affected consumer spending, consumer confidence and economic growth more broadly. These reports also shed light on supply chain issues and rising inflation, he notes.
  3. Federal Reserve comments. Central bankers aren’t scheduled to meet in October but investors will monitor communications from officials that could offer more insight as to when the Fed will begin tapering bond purchases.
  4. Covid-19 developments. “If there’s any factor that could eclipse the others, that one certainly is Covid,” Bassuk says. A full month has now passed with students across the country back in school and more employees in offices once again, so he’ll continue to monitor case counts and what companies are saying during earnings season. Depending on how the pandemic is trending, that could provide either “outsized good news or cautionary news” for the market in October.
  5. Geopolitical developments. The Evergrande news out of China reminded market participants that events overseas can—and do—affect U.S. stock prices. Along with known issues, like China’s crackdown on the tech industry, any geopolitical developments could rattle markets during a time of potentially higher volatility, he adds.

October’s Reputation and Volatility

October doesn’t have a great reputation on Wall Street, thanks to the two major crashes that happened in the month, in 1929 and 1987. Crashes aside, October is actually a pretty average month historically, with typical gains of 0.4% going back to 1928, according to Yardeni Research.

This year, a lot will be riding on earnings season—a period that sees higher volatility for individual stocks and the market as a whole.

“We expect market volatility to be elevated for U.S. equities not only for October but through the end of the year,” says Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. The information that companies share during the multi-week reporting period is likely to set the tone for the market for the next several months, adds Sandven, even if it does bring more volatility in the process.

At stake is whether the big surge in stock prices earlier in the year is still justified given the potential impact of the continued pandemic and higher inflation on corporate profit. “Our belief is that this is going to be an earnings period that has more uncertainty than perhaps the first two quarters of the year,” Sandven says.

That said, Sandven says he maintains a “glass half full” outlook for the market given relatively low interest rates and inflation that’s heating up but still moderate. “That still presents a favorable backdrop for equities,” he adds.

How to Invest in October

Even with the prospect of more volatility ahead, Sandven and his colleagues have been advising clients that equities are still attractive for investment. Consider this: 42% of companies in the S&P 500 are paying a dividend that yields more than the rate for the benchmark U.S. Treasury note, which is currently just about 1.5%. “Equities are still attractive for investors looking for income,” Sandven says.

Meanwhile, Bassuk says he’s been advising clients on how to position their portfolio for the prospect of higher inflation. “The first thing we are really advocating for is greater diversification,” he says.

Rather than “wholesale changes,” he recommends investing in assets—like alternative assets or real estate—that offer lower volatility and some downside protection in the event of a further decline in the stock market. In stocks, investors may want to consider a sector rotation strategy of moving out of some of the market’s biggest winners year-to-date and into the laggards, he adds.

Like many investors, Bassuk says the market is “ripe” for a correction after the tremendous gains earlier in the year. What’s more, the very fact that people expect volatility may actually create that market choppiness, he adds.