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Why I'm not worried about this fall in the stock market

Peter Switzer
1 November 2023

The US stock market is on its last day of October and all three major indexes are heading for three months straight of losses. And it’s taken the S&P 500 down around 8.8%, while our S&P/ASX 200 index was off 8.5%. You can pretty well blame Wall Street and our market’s slavish follow-the-leader mentality for the size of this loss.

I always expected a tricky August and September — they usually are negatively-inclined months in the US. There’s an old historical piece of advice to investors that goes: “Sell in May and go away, come back on St Leger’s Day”, which is around mid-September. Then by October, markets usually start to improve, unless it’s crash-time, like it was on Black Tuesday of 1929 or Black Monday of 1987. The latter date was the crash that took me from an economics academic to media market commentator and financial adviser.

By the way, as an adviser, I love seeing my clients but it’s more enjoyable when the returns are great. Until a couple of months ago, our returns for the financial year and even the past 12 months were in the range of 8% to 14%, depending on the client’s risk profile. This was pretty good given 2022 was the worst year ever for bonds.

What did help returns was a bounce-back in stocks that happened in the December quarter of last year, which I had been predicting to clients when returns were affected by both the stock market and the bond market falling together, which is historically unusual. We usually mix up portfolios with bonds and stocks, so if one does poorly, the other counterweighs and reduces the losses to create pretty good returns more years than not.

You can never be definitive about the crazy things stock markets can do but as Kath from Kath & Kim might say: “I don’t feel in me waters that a crash is coming.” In fact, I expect the opposite. And others agree.

Before heading to sleep last night, I received this from the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organisations — deVere Group’s Nigel Green. In a nutshell, despite corrections and weak investor sentiment, he advised he expected global financial markets were likely to rally in November and December. “History shows that November is the second-best month of the year for markets, behind April,” he observed. “This November could be even more positive as some markets are currently in correction territory – falling by more than 10% - and so a swing to the upside will be more pronounced.”

Nigel then pulled out some interesting history. “Over 72 years there have been 34 market declines. Only 12 of these have turned into bear markets. When does a recovery typically happen? 96 days after the start of the correction. We’re now around day 90,” he noted. “If all this data holds up, we’re about to see a year-end rally, which investors would not want to miss out on.”

But there are other positive omens, and I loved this from CNBC. According to the Bespoke Group, this year is the ninth year since 1928 that stocks have fallen in August, September and October. “The three last times the broader index fell during each of those months was in 2016, 1990 and 1977,” Pia Singh writes. “The S&P 500 gained 3.42% in November 2016 and 5.99% in November 1990, according to Bespoke.”

What could help or hinder my positivity about stocks will be what the Federal Reserve boss Jerome Powell says overnight in the US. “If the Fed comes out and says they’re probably done for the year, gives hints that they’re feeling more dovish, that could be one thing that really helps,” said Ross Mayfield, investment strategy analyst at Baird. “But I do think you need some downward pressure on rates to actually get a more sustainable move in stocks.”

To complete the week, we see the US October’s payrolls report on Friday. Seeing some kind of slowdown in the US labour market would be another help to stocks, as it would imply that wage costs won’t hurt the improving picture for inflation in the US.

If you need other reasons to believe stocks can rise, even with the war in the Middle East, try these other market-plus reasons for optimism for stocks:

  1. The 4th year of a US President is the second-best year for stocks.
  2. Two things can happen after a stock market correction. It can either turn into a bear market, which is a 20% or more decline, or it can return to growth and trade higher. Bear markets are much less common than corrections, and more often than not, a correction is followed by a return to positive stock market gains. (Forbes.com)
  3. Most of the S&P 500’s rise was dependent on 7 big stocks. The expectation is that when interest rates stop rising, many companies in the S&P 500 will start to rise on the belief that lower interest rates will help their bottom lines.
  4. The Fed is expected not to raise rates in November or December, and if US economic data points to lowering inflation, then markets will expect rate cuts in 2024. Now that historically is good for stocks.
  5. This chart.

I shot this on my phone from CNBC last week. What it shows is expected US company profits for the next three quarters. The rising yellow bars say experts are expecting rising profits for US companies. Profits underpin stock prices and the rise of these yellow bars on the chart really surprised me, as it says that expert company watchers were really positive about future profits.

I hope they’re on the money because it will drive stock prices higher in 2024.

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