In September, the S&P 500 fell about 8.6%. It's been an even worse year for the broader benchmark index, which is down close to 25% and is now firmly in a bear market this year.
It's certainly reasonable for investors to feel frustrated right now in what have been very difficult market conditions. But history tells us that every bear market will eventually be followed a bull market that will reach new heights, so do the best you can to stay patient and keep the faith.
Here are three things that could get the stock market back on track in October.
1. A good inflation report
Every month, the U.S. Bureau of Labor Statistics reports various inflation data for the prior month through the Consumer Price Index (CPI), which tracks the prices on a market basket of common goods and services.
The market could desperately use a positive inflation report when BLS reports September data on Oct. 13. Inflation has been stubbornly high this year, which is fueling aggressive interest rate hikes by the Federal Reserve. Investors are looking for proof that inflation is peaking and coming down.
While the CPI remained unchanged in July, making investors think that inflation had peaked, the CPI then ticked up slightly in August, sending stocks tumbling. The Fed has also signaled that it's planning more large rate hikes in its final two meetings of the year.
However, if inflation can show signs of peaking and falling, the Fed may curb those expectations and stocks may rally. The CPI reading last month caught everyone by surprise, so be on your toes for the next report. But it also could be just the news the market needs.
2. Bond yields cooling off
Another factor that could help stocks is if bond yields can relax a little bit. Recently, the yield on the 10-year U.S. Treasury bill topped 4% for the first time in a decade.
Rising yields can be bad for stocks because when safer assets like Treasury debt yield more, it makes them more appealing than riskier assets. Furthermore, higher bond yields makes debt more expensive, which companies may have been using to fuel growth or share repurchases.
Rising yields also reduce a company's future cash flows, which will cut into their valuations and can be a headache for the broader economy. Currently, the yields on shorter-term U.S. Treasury bills are higher than longer-dated U.S. Treasury bills, which is normally a flashing sign of a recession. The yield on the 10-year is also heavily correlated to mortgage rates, which recently hit 6.7%. This will cool off demand and likely lead to falling home values.
Yields can be triggered by inflation expectations and how investors view economic growth, so if yields can cool off a little bit, that would likely help the market. A good inflation report might help with the cause.
3. A weakening dollar
The U.S. dollar has shot up to a 20-year high this year, reaching parity with the euro and almost reaching parity with the British pound sterling until the Bank of England recently stepped in. While a strong dollar might seem beneficial on its face, stretching your vacation budget abroad, it's actually not such a great thing for the market.
The global economy is incredibly connected nowadays, so struggles in other countries tend to work their way over to the U.S. The reason the dollar is so strong right now is that investors are very worried about what will happen in Europe, which is expected to see a severe recession next year, given current conditions.
Think about all the large U.S.-based companies and all the international business they do, whether it's in Europe or China, which is having economic issues of its own. This could lead to more pain in company earnings reports and result in lower valuations.
History tells us that a strong U.S. dollar tends to occur in times of duress. For instance, the dollar jumped 22% in the back half of 2008 during the Great Recession and 7% in early 2020 when the pandemic hit.
I'm not so sure that a sharp and sudden collapse in the dollar would be great for stocks, but some cooling of the dollar might be a good sign for investors and promote more buying activity.