Crash the Markets in October?

Traditionally, the stock market hits the skids in October. Some of the biggest crashes were fall season events. The Bank Panic of 1907, the Stock Market Crash of 1929, and Black Monday 1987 all happened in October.

There are plenty of reasons to believe typical investors can be spooked easy, especially when they see the media hype up the correction event. There are so many reasons why a fall could accelerate and result in a big correction event.

It’s not that we’re deliberately getting pessimistic as the NASDAQ, Dow Jones, S&P and Russell Index float at high tide.  We just want to be able to plan ahead, know how to hedge a crash, or avoid stocks that could crash.

Winter Brings Cold Returns

Profits are meager during the winter so why keep your money in equities that won’t perform? You can park your money elsewhere, can’t you? How about Bitcoin or Gold? Smart investors are already entertaining this thought process and hunting for promising securities that will beat a stock market downturn.

September might be fine after an incredible stock price performance this summer. Earnings were very good. That drew in individual retail investors in the droves, pumping in $27.9 billion into the U.S. stock market in June and just as much in July. With shockwaves coming, this same crowd will be ready to pull the plug on the stock market to protect their wealth.

But some of the stock market advisors have been taking about a  correction throughout the summer:

  • Morgan Stanley’s Wilson Sees 10% S&P 500 Correction by Year-End
  • Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management10 sees -15% Correction Coming
  • Ariel Investments Chairman and co-CEO John Rogers sees “more than a little froth” in markets

With equity prices high and the Fed talking about tapering off their purchase of securities, Covid surges growing, and expectations of high inflation and interest rate rises, it seems reasonable to think this market is going to take a dive from its record setting heights.  It’s not the end just yet, but it’s the big tremor before that event in 2023.

The reopening trade was expected to be really strong, but Goldman Sachs is saying it is faltering with the new Covid Delta surge and threat. Businesses still have trouble reopening and the tourism industry (airlines) is tapering off quickly already. Amazon, Google, Facebook and other big tech companies are delaying their demand for a return to their head offices until 2022.

We’re not back to a normal work environment quite yet, and Covid is lingering too long. Euphoric investors are realizing Covid is going to stick around and many Americans simply won’t get a vaccination shot.

Consumer confidence is down and that reflects the general mood of Americans. This will reduce retail spending and with the housing market slowing down, major home related purchases will fade off too. With inflation hitting harder, it suggests the economy is about to slow down.

Today’s ADP jobs numbers have fallen well short of expectations, and many Americans are going to lose their jobless benefits during September. They’ll be more cautious about spending and may experience trouble with their mortgages and rent payments.

“High frequency labor market data are signaling a marked slowdown in employment activity in the August payroll survey week, suggesting downside risk to our forecast,” warned BofA Securities U.S. economist Joseph Song on Yahoo Finance Live.

AAII & Yahoo Sentiment Survey

Both the American Association of Individual Investors and Yahoo have published investor sentiment surveys. They help us know the pulse and perhaps intent of investors.

AAII’s investor sentiment is showing some bearish signals however, last week, investors were very bullish. We’ll certainly keep an eye on the sentiment indexes as a sell signal.

Investor Sentiment Survey. Screenshot courtesy of AAII
Consumer sentiment history timeline
Invest Sentiment. Screenshot courtesy of Yahoo.

Consumer Sentiment

How about consumer sentiment? Is it a factor or just a lagging indicator? Right now it seems, consumers are not all that optimistic about conditions. Is it just Covid or something else? UofM’s survey showed consumer confidence fell by 13.4% from July — the least favorable economic prospects in more than 10 years. Such data predicts reduced spending that lasts a longer time (right through this fall).

University of Michigan Consumer Confidence Survey. Screenshot courtesy of UofM

US: Too Many High Priced Issues to Solve

With Biden obsessed with expensive alternative energy, the US will suffer higher energy costs including oil and gasoline which weighs the economy down and reduces consumer expenditures.

With unemployment high and tough to resolve, is pessimism something that peak with a market crash?

I don’t forecast that the economy will fail this fall or in 2022, but 2023 is an entirely different matter. When the Republicans win the Senate next fall, they will block the Dem’s big spending ways. The conflict between the two could create significant stalemates that cripple the economy. And the US mountainous debt load cannot be serviced well in that atmosphere.

I’ve mentioned about Joe Biden juggling firey problems, and multitasking just isn’t his strength. His cognitive decline will increase under these pressures. If Kamala Harris were to become President, it absolutely will cause investors to jettison their stocks and batten down the hatches for a recession. The political situation is blaringly troublesome for the economy going forward.

The Variable No One is Talking about is Investor Panic

No one, including major investment advisors are talking about small investors emotions. Clearly, with euphoric level bidding up of stock prices based on fleeting, transitory events, we know investors are too emotional about the market. Volatility is high. Too few refer to balance sheets of companies and realistic valuations. The word real has disappeared.

The new stock market is ruled by individual, self-directed investors who don’t have much of a margin for losses. They will not like losing their money. It hurts their pride and they resent losing their shirt due to their favorite equities plunging, such as Bitcoin, Robinhood, AMC, Virgin Galactic, Dogecoin, and other meme stocks.

Seriously, just the presence of meme stocks tells us investors are not in their right minds. When a correction happens in October, a lot of investors will come down to earth. They’ll get scared and dump their meme class stocks and look for something with long term staying power.

I believe small investors may try to park briefly in Bitcoin, but not large fund managers. That’s too risky and they’ll need to get out BTC right away. Investors will discover the asset-less stock is perhaps the most volatile, least secure store of investment value possible. After that big correction event, you’ll get your Bitcoin cheap. See more on the Bitcoin forecast.

Even if you don’t believe a big fall correction is coming, you should still consider which stocks are best before a crash, how to hedge a crash, and which are the best stocks to buy in 2022.

A completely accurate stock market forecast is impossible because political decisions are the key factor. It all comes down to whether Biden will make sound decisions American investors like. Those decisions won’t be to the liking of investors, and if unemployment was to rise again, consumers and emotional self-directed investors will react in panic.

This October’s big panic sell-off will pass however, so you’ll enjoy a wonderful buy the dip opportunity!

Which stocks will you buy: Google, Microsoft, Apple, Facebook, Amazon, Tesla , or maybe Bitcoin?

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