Market Forecast: Overcast or Clear?

by Warren Seah

The market forecast appears to be cloudy, with investors feeling uncertain about the strength of the economy, future actions by the Federal Reserve, and corporate earnings. These questions remain unanswered, leaving investors on uncertain ground. However, despite the ambiguity, this may actually be a prime opportunity to buy stocks.

A Tough September

September lived up to its reputation as a challenging month for stock investors. The S&P 500 index experienced a dip of 0.74% this past week, closing the month with a decline of 4.87%, marking its worst month since December. Similarly, the Dow Jones Industrial Average finished the month down 3.50% after a 1.34% slide. The Nasdaq Composite, after a slight increase of 0.06% this week, dropped 5.81% in September.

A Month to Dislike

The past month brought about several factors that worried stock investors. The Federal Reserve’s “hawkish pause,” the looming federal government shutdown, increased bond yields, and rising oil prices all contributed to a sense of discontent. As a result, only 27.8% of respondents in the American Association of Individual Investors sentiment survey identified themselves as bullish, marking the lowest level in four months.

Finding Hope in October

Despite the seemingly dark days of October, there are reasons for optimism in the stock market. One straightforward argument for a near-term bounce is mean reversion. Historically, periods where stocks continuously decline have often been followed by a rebound effect in subsequent periods. Analysts at Bespoke Investment Group emphasized this point in their recent analysis.

In conclusion, while uncertainty looms over the market forecast, there is potential for a brighter future. Investors should consider the possibility of a near-term bounce and evaluate the opportunities available in this current landscape.

The Data Back Them Up

In September’s first 20 trading days, the S&P 500 experienced significant selling pressure, hitting a low below the previous day’s low on 15 occasions. This included a notable stretch of nine consecutive days with lower lows. Similar occurrences have only happened 14 times since 1993 prior to this September. However, historical data shows that after such episodes, the index was higher 79% of the time three months later, with an average increase of 8.1% (Bespoke).

Technical Analysis Supports Market Confidence

The S&P 500 has found support around the 4300 level, just as it did during pullbacks in June and August. Although the index closed at 4288, if this level were to break, the next support can be found at the 200-day moving average around 4200. Market technicians would generally anticipate these levels to hold if all other factors remain constant.

Positive Expectations for Third-Quarter Earnings

The upcoming third-quarter earnings season, beginning on October 13, will shed light on the fundamental side of the market. Large banks such as JPMorgan Chase (ticker: JPM) are expected to report modest year-over-year earnings per share growth of 2% for the S&P 500. It’s worth noting that this follows three consecutive quarters of negative or stagnant growth. Encouraging results during this season could help sustain optimistic expectations for a 12% earnings growth in 2024.

Climbing the Wall of Concerns

Despite existing concerns in the market, these obstacles may ultimately create a new “wall of worry” for stocks to overcome. Notably, there will be a lack of news on the monetary policy front until November when the Federal Reserve meets again. While concerns about potential government shutdowns due to congressional dysfunction persist, the impact on the stock market is usually less severe than it is on the broader country. Instead of dwelling on worries for the future, it is more prudent to focus on immediate market conditions.

Shifting Towards a Favorable Season

With October’s arrival, stocks are transitioning away from a historically weak period and entering a more favorable stretch. The final months of the year have often generated positive market performance, with a “Santa Claus rally” frequently observed in December. It is essential to note that one does not need to believe in Santa to acknowledge that the current market trend appears to be upward and to the right.

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