Will October Spook Stock Market Investors?

Investing, Investing Data, Investing Strategy
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Will Autumn Bring Falling Stocks (Finally?)

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Never mind things that go bump in the night. During October, investors will be on the lookout for a stock market that goes thump in the daytime.

There’s no specific reason to believe the market is poised for a plummet — naysayers have been predicting a slump all year that’s remained elusive: The Standard & Poor’s 500 index has soared more than 12%, seemingly impervious to any bad news.

And yet, October hasn’t been the kindest month for investors in years past. This year marks the 30th anniversary of the market’s single-worst day: Oct. 19, 1987, or so-called Black Monday, when the S&P 500 plunged more than 20%. Not to be confused with Black Tuesday, the biggest slump during the October 1929 stock market crash. There are others; in fact, five of the market’s 10 worst days happened during the month.

Will this October bring tricks or (more) treats? Here’s what three professional investors will be watching in the market — and their tips for navigating the month ahead.

1. Don’t obsess about the bogeyman

For investors of a certain generation, it’s impossible to forget painful memories of markets past, but obsessing about the next sell-off (or what will cause it) isn’t a fruitful exercise — now or ever.

The market will be “anniversarying a lot of bad things” at a time when investors have other, legitimate worries, says Yana Barton, a vice president and equity portfolio manager at Eaton Vance. The concerns aren’t necessarily new — including tensions with North Korea or uncertainty about policy decisions from Congress — though October’s reputation could also temper enthusiasm, she says.

“People are focusing on what can go wrong, but we’ve been thinking about what can go right,” Barton says. Sentiment and corporate earnings give her reason to be optimistic the rally will continue.

Here’s why. People have been saying one thing (for most of the year, about 60% of retail investors have expected stock prices to go down or be unchanged in the next six months, according to a weekly survey by the American Association of Individual Investors) but doing another (pushing up stock prices and driving the market to a series of all-time highs).

Meanwhile, analysts project corporate earnings will grow 4.2% in the third quarter from a year ago, and that’s still healthy, even if lower than prior forecasts, Barton adds. The multiweek period when public companies report quarterly results unofficially kicks off Oct. 18.

“It’s important to look at the market’s health today — and we’re nowhere close to some of these events of the past,” Barton says.

Bottom line for you: Look forward, not backward. Be selective about what stocks you own — including why they’re good, long-term investments — and understand how current events could impact your portfolio, Barton says. “Focus on those evergreen investment disciplines that will never go out of style.”

» Ready to test the waters? Research NerdWallet’s picks of best brokers for beginner investors.

2. Step outside your comfort zone

The market’s resilience this year has surprised many veterans and frustrated those waiting (or even wishing) for a sell-off. To date, the S&P 500 has risen or fallen in excess of 1% only eight days — tracking far below the annual average of 52 days over 50-plus years, according to data compiled by Jeffrey Hirsch, editor-in-chief of Stock Trader’s Almanac.

“Markets aren’t churning as much on news as we’ve seen in the past — and as people normally would expect,” says Mark Hackett, chief of investment research at Nationwide. That’s good news; investors are paying attention to fundamentals — things like Federal Reserve policy, economic data and corporate earnings — all of which currently support higher stock prices, he adds.

For some investors, the U.S. market may seem a bit “boring” even as it inches higher — and stocks in Europe and Japan may be worth a look, Hackett advises. The benchmark gauges in these regions have surpassed the U.S.’s gains in the past 12 months, thanks to a healthy environment of solid economic and corporate earnings growth, he says.

That trend could continue. “It’s not necessarily that the U.S. market is going to go down, but that the rest of the world is going to outperform,” Hackett says.

Bottom line for you: Venture out. Many investors favor stocks in their region and don’t invest as much, or at all, in international markets. Even for long-term investors, now is a good time to make sure your portfolio has allocations beyond the U.S., Hackett advises.

» MORE: How to research stocks

3. Look for the market’s treats

Just because the market’s up this year, that’s not true of all stocks. The S&P 500 is made up of 11 sectors, and there’s a broad disparity of performance year-to-date — ranging from the leaders, technology stocks (up more than 20%), to the laggards, energy stocks (down 9%).

You’ve heard it before: Past performance doesn’t indicate future returns. And yet, history can be a valuable tool when evaluating sectors and whether similar patterns will re-emerge, says Denise Chisholm, a strategist at Fidelity Investments. “Some things in the past can predict the future with decent odds — and the dollar is one of those things.”

The U.S. dollar has depreciated this year relative to other currencies, falling to a 33-month low in September. Based on similar periods in the past (which are unique), the dollar’s performance portends two things with good odds — corporate profits will increase and inflation will pick up, Chisholm says.

What does that mean for stocks? Financials could do well in the next 12 months, and opportunistic investors may want to take note, Chisholm says. This group — which includes all the big banks — has trailed the broader market with gains of almost 11% in 2017. Meanwhile, other possible catalysts (rising interest rates or looser lending standards by banks) would also benefit financial stocks, she adds.

Chisholm’s analysis also points to positive indicators for technology and health care stocks ahead. That could underpin a continued rally in the broad market — while creating opportunities within.

Bottom line for you: Embrace diversification. Spreading your money around to include investments in multiple sectors helps mitigate risks — while increasing potential returns. Even long-term investors can benefit from shorter-term phenomena. “There’s been a significant change for financials and it’s pretty timely,” Chisholm says.

» Why diversification matters: An easy way to reduce investing risk

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