My 3 Biggest Stock Market Predictions for October

Even if you’re investing for the long term, it can certainly help you feel more comfortable with your decisions if you have an idea of ​​what’s going to happen in the very short term.

Of course, there’s no guarantee that your ideas (or mine) about the future of the market will be accurate, but setting the right expectations is much easier when you can appreciate the most important factors at play. So without further ado, here’s my three biggest predictions for October. Even if they turn out to be false, you will benefit from thinking of all three.

1. The bear market will continue and biotech and cannabis stocks will continue to underperform as a group

If you’re hoping for the bear market to give way to calmer waters this month, chances are you’ll be disappointed. On average, bear markets last about 9.5 months. This means that the current bear market has recently reached the average lifespan, but also that half of all these markets last longer. And there are a handful of headwinds and trends that are likely to keep this one going.

More importantly, investor sentiment is absolutely abysmal and not improving much. At the end of September, fewer investors expressed bullish sentiment than a month earlier, with only 20% saying they expected the market to rise, compared to 27.7% at the end of August. For the bear market to end, this has to change. But there may not be any catalyst in sight for that to happen, and there could be factors that will worsen the sentiment very soon.

In particular, the consequences of the bear market have so far been particularly harsh for companies in growth sectors such as biotechnology and cannabis. Industry monitoring SPDR S&P Biotech ETF (XBI -1.83%) is down 26.1% while the market is down almost 24% and AdvisorShares Pure US Cannabis ETF (MSOS -6.86%) even worse, with a 64.6% drop this year. And this underperformance against the market decline of around 19.6% is unlikely to change until sentiment improves.

2. All eyes will remain on the Federal Reserve and its actions to control inflation

My second biggest prediction for October is that Federal Reserve decisions will likely continue to have an outsized effect on your portfolio. The Federal Reserve sets the federal funds rate, which determines the interest rate at which US banks can lend to each other. In turn, increases in the federal funds rate ripple through the rest of the economy, where they determine the rate businesses have to pay when they borrow money.

As you may have heard, the Fed’s attempts to control inflation hinge on its ability to make money more expensive to borrow, thereby reducing the ability of businesses to finance expansion that boosts demand for goods. and services. As demand falls, the upward pressure on prices should in theory ease, bringing the pace of inflation down to a more acceptable level. And with inflation not yet showing signs of slowing down, it is reasonable to expect the Fed to continue raising interest rates. Right now it is 3.25%, whereas a year ago it was just 0.25%.

The implication of rising interest rates is another sign that growth stocks will continue to struggle, as almost by definition companies are the most likely to need to borrow money. to develop. So if you’re not comfortable taking above-average risk, it may be worth avoiding buying stocks of biotech or cannabis companies if rates continue to rise and make lower the stock price. The market is likely to punish them in the short term even if their long-term potential is not affected by the rise in rates.

3. Things will get weirder and investors will get even more finicky

Because the US financial system is a major component of the global financial system, rising interest rates can cause problems far from the country’s shores. The problem is that investors as a group don’t necessarily know where these problems will arise or what they will look like. Thus, the broadly bearish sentiment has an undercurrent of scary flight that could turn into panic.

If you don’t believe things are getting weird already, consider that October 2, a Sunday, the bank Swiss credit (CS -7.63%) decided to calm its investors following the fall in its share price. More than one market commentator raises the specter of the Lehman Brothers explosion that sparked the 2008 financial crisis when discussing the bank’s financial health.

Whatever Credit Suisse’s underlying problems, the fact is that it is not normal for such calamitous comparisons to swirl when the derivative securities issued by a single company fluctuate. Nor is it normal for the management of a major international bank to scramble to reassure shareholders over the weekend.

In short, expect the market to produce more sources of (potentially fully justifiable) paranoia about the health of the financial system – and don’t let that fool you. Keep your portfolio diversified and don’t be afraid of the market.

Alex Carchidi has no position in the stocks mentioned. The Motley Fool holds positions and recommends SPDR S&P Biotech. The Motley Fool has a disclosure policy.

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