The Uncertain Forecast for the Market

The forecast for the market is cloudy at best—and there are no meatballs involved. Questions about the strength of the economy, what the Federal Reserve plans to do next, and even the path of corporate earnings won’t be answered for months, leaving certainty-starved investors feeling like they’re walking on quicksand. But amidst these uncertainties, it’s a good time to buy stocks anyway.

Reasons for Optimism

The reasons for optimism start with a just-completed September, which lived up to its reputation as the toughest stretch of the year for stock investors. The S&P 500 index—which dipped 0.74% this past week—closed the month down 4.87%, its worst month since December, while the Dow Jones Industrial Average slid 1.34% to finish the month off 3.50%. The Nasdaq Composite dropped 5.81% in September after rising 0.06% this past week.

Challenges Faced

There was a lot to dislike about the past month. Over those 30 days, stock investors have had to contend with a “hawkish pause” by the Fed, a looming federal government shutdown, a jump in bond yields, and rising oil prices. No wonder just 27.8% of respondents in the American Association of Individual Investors sentiment survey described themselves as bullish—the lowest level in four months.

Embracing a Positive Outlook

Yet even as the days darken in October, the market’s disposition should become sunnier. The most straightforward argument for a near-term bounce in the stock market is simple mean reversion. According to analysts at Bespoke Investment Group, "one-month periods where stocks do nothing but go down have usually seen a bounceback effect in the period that followed."

The Path to Higher Stock Market Performance

The recent volatility in the S&P 500 has raised concerns among investors. However, historical data suggests that these fluctuations may not be cause for alarm. In September alone, the S&P 500 hit new intraday lows on 15 occasions, with nine consecutive days of selling pressure. Surprisingly, these trends have only occurred 14 times since 1993 prior to this September. Interestingly, despite the lower lows, the index was higher 79% of the time three months later, and saw an average increase of 8.1%.

When analyzing the S&P 500, it becomes evident that there is a pattern of support around the 4300 mark, as observed during pullbacks in June and August. Even if this level were to break, experts believe that the next level of support can be found at the 200-day moving average near 4200. Thus, market technicians predict that these levels will likely hold.

On the fundamental side, the upcoming third-quarter earnings season is set to begin on October 13th with reports from JPMorgan Chase (JPM) and other major banks. Analysts anticipate a modest 2% year-over-year increase in S&P 500 earnings per share. This follows three consecutive quarters of negative or stagnant growth. However, positive earnings results would help sustain expectations for a 12% earnings growth in 2024.

While there are concerns and uncertainties in the market, it's important to note that these could also present opportunities. The lack of upcoming monetary policy news until November creates a news vacuum in that area. Additionally, although there is a risk of a government shutdown due to congressional dysfunction, this would pose a bigger problem for the country than for the stock market. It's prudent to focus on nearer-term issues rather than worrying about 2024.

As we enter the month of October, it's worth noting that this period has historically marked a shift from a seasonally weak time of the year to one that tends to display stronger performance. In fact, the final months of the year often see a "Santa Claus rally" in December. While belief in Santa is not required, it's evident that the overall trend appears to be upwards and to the right.

In conclusion, despite recent market fluctuations and lingering concerns, the evidence suggests that the stock market is poised for growth. By focusing on historical data, upcoming earnings reports, and the favorable seasonal trends, investors can find reassurance in the path of least resistance pointing towards upward momentum.