Even if you're investing for the long term, it can sure help you to feel more comfortable with your decisions if you have an idea about what's going to happen in the very near term.
Of course, there's no guarantee that your ideas (or mine) about the market's future will be accurate, but setting the right expectations is a lot easier when you can appreciate the most important factors at play. So without further ado, here are my three biggest predictions for October. Even if they prove to be false, you'll benefit from thinking about all three.
NYSEMKT: XBI
Key Data Points
1. The bear market will continue, and biotech and cannabis stocks will continue underperforming as a group
If you're hoping that the bear market is going to give way to calmer waters this month, there's a good chance you'll be disappointed. On average, bear markets last around 9.5 months. That means the current bear market just recently reached the average lifespan, but also that half of all such markets go on for longer. And there are a handful of headwinds and trends that are likely to keep this one going.
Most importantly, investor sentiment is absolutely abysmal, and it isn't improving much. At the end of September, fewer investors expressed bullish sentiment than a month prior, 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, that needs to change. But there might not be any catalysts in sight for that to happen, and there might be factors that will make sentiment worse quite soon.
In particular, the consequences of the bear market are so far especially harsh for companies in growth industries like biotechnology and cannabis. The industry-tracking SPDR S&P Biotech ETF (XBI +0.70%) is down 26.1% in contrast to the market's decline of near 24%, and the AdvisorShares Pure US Cannabis ETF (MSOS 0.41%) is doing even worse, with a drop of 64.6% this year. And that underperformance relative to the market's decline of around 19.6% is unlikely to change until sentiment improves.
NYSEMKT: MSOS
Key Data Points
2. All eyes will stay on the Federal Reserve and its actions to control inflation
My second biggest prediction for October is that the decisions of the Federal Reserve 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 U.S. banks can lend to each other. In turn, increases to the federal funds rate trickle down to the rest of the economy, where it determines the rate companies need 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 culling the ability of businesses to finance expansion that stimulates demand for goods and services. As demand drops, the upward pressure on prices should in theory attenuate, reducing the pace of inflation to a more palatable level. And with inflation not showing signs of slowing yet, it's reasonable to expect the Fed to continue hiking the interest rate. Right now, it's at 3.25%, whereas a year ago it was a mere 0.25%.
The implication of rising interest rates is another sign that growth stocks will continue to struggle, as almost by definition they're the companies that are the most likely to need to borrow money to expand. So, if you're not comfortable with taking on a higher-than-average amount of risk, it might be worth avoiding buying shares of biotechs or cannabis businesses if rates continue to rise and drive down share prices. The market is likely to punish them in the short term even if their long-term potential is unaffected by rising rates.
3. Things will get weirder and investors will become even more skittish
Because the U.S. financial system is a major component of the globe's financial system, rising interest rates can cause problems far from the country's shores. The trouble is, investors as a group don't necessarily know where those problems will crop up or what they'll look like. So, the broadly bearish sentiment has an undercurrent of fearful flightiness that could break through into panic.
If you don't believe that things are already getting weird, consider that on Oct. 2, a Sunday, the bank Credit Suisse (CS +0.00%) moved to calm its investors in the wake of its falling share price. More than one market commentator is invoking the specter of the Lehman Brothers blowup that sparked the 2008 financial crisis when discussing the bank's financial health.
NYSE: CS
Key Data Points
Whatever Credit Suisse's underlying issues may be, the point is that it isn't normal for such calamitous comparisons to swirl when the derivative securities issued by one single business fluctuate. Nor is it normal for 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 fall for it. Keep your portfolio diversified, and don't get scared out of the market.
