In late September, we did breach the old low on the S&P 500 of 3636 (set in June), which leads me to believe that new money should be patient when buying stocks. I certainly would recommend dollar cost averaging, whereby an investor adds sums of money to the market at regular intervals, rather than placing it in all at once.
I stand by my belief that the US will have an economic recession within the next year. It’s not a 100% chance, but I think it is well north of 50%. The question is, what does that mean for investors?
Well, there are some key risks that remain, including:
- Fed raises rates too much too fast
- Inflation remains persistent for longer.
- China/Taiwan tensions elevate.
- Increased escalation and duration of Russia/Ukraine conflict and related sanctions.
- Oil/natural gas prices surge to record highs.
- Big tech comes under fire once again from Congress.
- Consumer spending softens.
- China’s zero tolerance policy on Covid hampers growth.
- Europe slips into a deep recession
But on the other hand, we have had 24 consecutive weeks with a negative bull-bear spread (more individual investors think the market will go down than go up). That’s the second most since 1987, with only October of 2020 producing a longer streak at 34 weeks. Almost every time that investor bearishness is so pervasive, stocks end up higher over the next 12 months.
Also, according to Bank of America, there have been 20 bear markets over the past 140 years. The average duration is 289 days, which would put this bear ending on October 19 of 2022. So, we could be coming close to happier stock market days.
How about that chance for recession? Well, according to a study done by Invesco, markets don’t always decline in recessions. The average decline for the S&P 500 during the past nine recessions is 1.5% while the median decline is 3.4%. However, the index was positive during four of the past nine recessions. What do recessions mean for stocks? | Invesco US
The full decline from market peak to the end of the recession has averaged -15% for the S&P 500 according to their analysis. If markets are indeed worried about 1970s- style inflation, like the 1973 decline of 31%, then we are already 2/3 of the way there, as the S&P 500 is down 20+%.
The more important message of the study is that stock performance has been above average in the three months before the end of a recession, as well as the subsequent 1-, 3-, and 5-year periods. So, just because we may have a recession doesn’t mean investors have to sell stocks to prepare.
But what about October? Isn’t that a particularly bad month? In a recent report, NASQAQ Dorsey Wright writes that investors have a longstanding love-hate relationship with the month of October. Some of the more notorious market meltdowns have occurred or escalated in October; including 1978, 1987, and 2008. And several of the largest one-day market declines, including Black Monday (1987) and Black Tuesday (1929), happened in October. Still, the S&P 500 has had more double-digit gains in October than it has had double-digit losses since 1950. In fact, October is often referred to as the “bear killer,” as its end ushers in the beginning of the seasonally strong six months of the year. Nasdaq Dorsey Wright
Continuing, they note that October offered some of the more meaningful recent buying opportunities including 2011 and, more recently, in 2015. Historically speaking, October has been positive more often than not, as the S&P 500 has logged gains in 60% of the Octobers between 1950 and 2021. The average return for the month during this time frame is +0.85% (or 10.2% annualized). So, while October has produced some scary moments, it’s actually been a pretty good month, historically.
If you’re a long-term investor who doesn’t want to time the market, none of this matters much. Just maintain your recommended allocation to stocks and continue to buy at your normal intervals. That way you’ll be buying at low stock prices, too. However, those investors willing to take some risk on timing the market should consider that we may have better entry points than today’s levels.
Lastly, we’re coming up on some big dates in October, so don’t forget that open enrollment for Medicare Parts C and D begins. Also, October 15 is the final day to file a 2021 income tax return for those issued an extension. Finally, next year’s Social Security adjustment is typically announced in October, and it could be sizable this year, given the inflation that we have experienced.