How Deep Will Stocks Dive In October?

On the second day of the fourth quarter, US stocks took a fairly big hit, with the most widely-watches indices each dropping nearly two percent on the day. The current downdraft comes on the heels of two consecutive down weeks in the US markets, but the damage has been relatively mild.

Prior to Tuesday and Wednesday's heavy declines, the Dow Jones Industrial Average was down just over 300 points, a little more than a one percent drop. Combined, the Dow fell over 800 points on Monday and Tuesday, making the entire dip about 1100 points, or just over four percent.

This is nothing to be concerned with, for now, though a repeat of 2018, when stocks ripped lower in October and December, should not be ruled out. By many measures, a slew of US equites are significantly overvalued, thanks in large part to the long-running bull market fueled by excess money printing by central banks and corporate buybacks. These are the two major components of the heady bull market and it is readily apparent that neither of these policies are going to end anytime soon.

The Fed is planning another 25 basis point cut in the federal funds rate at their next FOMC meeting, October 29-30 and corporate stock buybacks are still close to all-time high levels. With the pair policies funding all manner of excess, it would not be surprising to see any sharp decline - such as a 10% correction - countered with more easy money policy.

If there is going to be a recession, Europe will undoubtably encounter one before the United States. The EU is being battered by Brexit fears and poor economic data at the same time and its own measures of QE are barely making a dent in the declining economic conditions on the Continent. Thus, investors in the US will likely have advance warning of any GDP suffering.

Bear in mind that an official recession is defined as two consecutive quarters of negative growth. Therefore, a recession doesn't even become apparent until it is well underway. If third quarter GDP returns a positive number, that would indicate that a recession is still at least three months ahead. The world would find out if the US is headed into recession if fourth quarter GDP came in as a negative number, and that would only be reported by late January 2020.

Finally, a recession is not the end of the world for commerce nor stock investing. There will be a general malaise, as the low tide would affect all stocks in some manner, but there will still be winners, most likely in consumer staples, utilities, and dividend plays. If and when dividend-yielding stocks start taking on heavy water, that would be a time for more focused concern.

For now, caution, not panic, is advisable.

At the Close, Wednesday, October 2, 2019:
Dow Jones Industrial Average: 26,078.62, -494.42 (-1.86%)
NASDAQ: 7,785.25, -123.44 (-1.56%)
S&P 500: 2,887.61, -52.64 (-1.79%)
NYSE Composite: 12,608.43, -226.92 (-1.77%)