My 3 Stock Market Predictions for October

Investors need some good news as we move into the fourth quarter, but it might be hard to find good reasons for optimism. Conditions continue to be challenging for stocks, and investors need to prepare themselves for more volatility and an ongoing bear market. Consider these stock market predictions for October, and manage your portfolio for long-term success.

1. A market recovery might not be right around the corner

Investors have spent most of this year wondering if we’ve hit the stock market bottom. Whether stocks move higher or lower over the next few weeks, the overall trend in the fourth quarter is likely to be negative.

Historical market results show that many of the strongest weeks and months closely followed big losses. Many investors take long-term positions when stocks get cheaper, and this can buoy the market. This is likely to provide some temporary relief in October. Fundamentals matter, though, and it’s tough to be bullish about growth or profitability right now. The most important macroeconomic factors are still pulling stocks downward.

Image source: Getty Images.

Rate hikes by the Fed are driving the current bear market by reducing economic growth and crushing investor risk appetite. The latest data indicated that inflation remains high, while the most recent jobless claims suggest that the labor market hasn’t dramatically cooled. The Fed is unlikely to pull back on its monetary tightening policy until there’s evidence that inflation is dropping. That’s bad news for stocks in the short term.

Rate hikes aren’t the only issue right now. The conflict in Ukraine is threatening global economic stability. There are serious concerns about a slowdown in China. The U.K. and other European countries are simultaneously dealing with recession and currency issues. These are all signs that the global macroeconomy remains in flux as we normalize from extensive disruptions related to COVID-19. Those challenges are negatively impacting corporate earnings, with many companies revising their outlooks downward for the rest of the year.

We might defy the odds in October and claw back some of September’s losses. However, there aren’t many growth catalysts to fuel a bull market – and all of the risk factors remain prominent. These issues won’t go away overnight.

2. Earnings season could trigger more sell-offs

Third-quarter earnings season kicks off later this month, and investors will be focused on forward-looking commentary from corporate executives. Recent earnings reports and economic indicators suggest that several key sectors could be in for a rough ride.

Last month, bellwether FedEx (NYSE: FDX) surprised investors by publishing a preliminary earnings update. FedEx indicated that it’s falling way short of forecasts due to global macroeconomic conditions. Major news from bellwether stocks is never isolated to that company, so this was a red flag for any large business that provides goods or services to enterprises. There’s a strong chance that we see gloomy outlooks from other industrials and business service stocks. With investors on edge, any earnings season negativity can trigger steep losses.

There are also rumors swirling about serious issues at major financial institutions. Bank stocks are among the big names that kick off earnings season, and they tend to struggle mightily in recessions. People stop getting mortgages, business lending slows, investment banks don’t see as much M&A activity, and asset management fees can dwindle. It could get ugly early.

Consumer stocks could be one of the few bright spots. Recent employment and consumer spending data suggest that individuals are holding up better than businesses. It could be the case that the Fed’s rate hikes have had the intended effect on corporate operations but that consumers will continue to chug along until layoffs start occurring en masse. Nike‘s (NYSE: NKE) September earnings report raised a red flag that consumer spending might be faltering, though, so don’t blindly trust consumer strength.

Don’t get caught off guard by troublesome earnings reports.

3. Value stocks could prove not to be immune from market pressures

Value stocks tend to outperform growth stocks during bear markets, and we’ve certainly seen that in action so far this year. Tech stocks with unsustainably high valuations have been crushed as their growth outlook slows and investors pull back on portfolio risk.

VTV and VUG data by YCharts.

Unfortunately, we’re seeing value stocks struggle as well now, suggesting that we’ve entered a new phase of the bear market. The downturn started with valuations returning to normal levels as interest rates moved higher from historically low levels. Now there are serious concerns about medium-term economic activity just about anywhere you look. The sell-off is broader, and value stocks aren’t the safe haven that they were earlier this year.

Investors need to keep a cool head in October and prepare themselves for volatility. This isn’t a good time to sell unless you absolutely have to. Long-term investors should continue adding to their holdings, with cheaper valuations providing attractive entry points. It’s as important as it’s ever been to make sure that your portfolio allocation reflects your investment time horizon and risk tolerance.

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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx and Nike. The Motley Fool has a disclosure policy.