Rocky October possible after unstable September as investor dangers loom

The October market story is actually sophisticated.

Should you thought September was complicated, October shouldn’t be more likely to be any higher, and it may very well be considerably rockier.

That is as a result of the “buckets” which have moved markets on varied days prior to now few months are all doubtlessly in play:

1. Elections: Uncertainty over whether or not there can be a winner on election evening, and President Donald Trump has signaled he could also be open to difficult the outcomes.
2. Stimulus: Can we get a last-ditch deal between Nancy Pelosi and Steven Mnuchin? The markets moved decrease Wednesday when no deal was introduced, so merchants nonetheless care.
3. Reopening: Higher financial information this week (Client Confidence, Chicago PMI, ADP Payrolls, Pending Dwelling Gross sales) should be balanced in opposition to an growing sea of layoffs (Shell, Dow, Disney, Marathon Petroleum). There can be extra layoff bulletins as earnings are introduced.
4. Remedy/vaccine: Will there be any section three trial information on the vaccine?
5. China commerce conflict: Any retaliation by the Chinese language is more likely to fall on megacap tech and semiconductor shares which can be market leaders.
6. Valuation: When Apple — the largest inventory within the U.S.— strikes in a greater than 20% buying and selling vary in a month, you already know merchants will not be certain what’s going on. Valuations wax and wane relying on the reopening outlook and vaccine hopes, none of which can be resolved any time quickly.

All of this ought to be making merchants nervous. With valuations excessive, there’s an terrible lot that may go incorrect.

However there’s a shocking quantity of optimism, a minimum of among the many skilled buying and selling neighborhood.

“Almost day-after-day we get financial information higher than anticipated, and I nonetheless suppose that’s what will win the day,” mentioned Jim Paulsen, chief funding strategist at The Leuthold Group. “You might have customers shopping for. Housing and auto gross sales are robust. IPOs are coming again to life. “

What a few spike in infections?  Paulsen acknowledges there’s concern {that a} spike might decelerate fourth-quarter development, which is why he believes one other stimulus bundle is vital to maintain the markets going. Except for that, he affords a novel interpretation of how to have a look at a fourth-quarter spike: “The nation will possible begin focusing extra on whether or not the loss of life price spikes than the an infection price. Many of the nation is working rather more safely than just a few months in the past, each personally and on the company stage. So I believe infections nonetheless matter, however the loss of life price is what’s going to matter much more.”

Extra layoffs coming? “It is not good, however have a look at the job development. Thus far there’s in all probability lower than 50,000 introduced layoffs, have a look at the ADP numbers. Over 700,000 jobs.”

As for valuations, many merchants really feel the mid-September correction, which noticed the S&P 500 drop about 10% and 15%-20% declines in lots of megacap tech shares, was simply the tonic the market wanted.

“A whole lot of the weak fingers received shaken out in the course of the correction in mid-September,” mentioned Alec Younger, chief funding officer for Tactical Alpha.

“We’re nonetheless 200 factors under the outdated excessive within the S&P,” he mentioned. “The market may have some time earlier than it will probably make a brand new excessive, however there are extra dangers of being out of the market than being in. So long as we get a fiscal deal, the market will grind greater.”

One final optimistic be aware: As we enter earnings season, the early studies have been virtually all optimistic, and earnings have been slowly creeping up, not down.

“There are numerous uncertainties, however there’s a lot going proper analysts and corporations are going to revise their estimates upwards,” Paulsen mentioned. “Wall Road goes to be revising up not simply its fourth quarter, however it’s 2021 numbers as nicely.”

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