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4 reasons why October could stink for the stock market, too

Brian Sozzi
·Editor-at-Large
·4-min read

Queue “We’ve Only Just Begun” from The Carpenters.

After a September that has seen the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite drop by more than 5% on average — paced by weakness in high-flying tech names such as Apple and Netflix — October is shaping up to be no walk in the park either, strategists warn.

“In short, uncertainty has rarely been higher for financial markets,” said Morgan Stanley strategist Mike Wilson in a new note to clients on Monday. Wilson — known on Wall Street for his uncanny ability to predict major market moves — thinks the S&P 500 and Nasdaq 100 could fall another 6% and 14%, respectively, in the near-term.

Here are Wilson’s four areas of concern for October. Proceed with caution into the new month, dip-buyers.

Concern #1: The U.S. fiscal cliff

Although the markets have staged solid rallies over the past two sessions on speculation lawmakers will ink a new round of stimulus soon, the reality is that economic data shows the economic recovery from the COVID-19 pandemic lows has stalled absent more fiscal help.

In turn, that dynamic could worsen in October — especially if lawmakers can’t agree on new stimulus weeks removed from a contentious presidential election on Nov. 3.

With Congress embroiled in election year politics, and a tussle over when to fill the Supreme Court vacancy, the odds of CARES 2 getting passed before Nov. 3 have dropped considerably,” warns Wilson.

Concern #2: COVID-19 second wave

The grim numbers on COVID-19 persist and in some cases, are worsening globally following relaxed social distancing requirements. Globally, there have been more than 33.1 million confirmed COVID-19 cases. The global death toll now stands at 998,000, according to data from Johns Hopkins University.

Lately, the rising number of COVID-19 cases has spurred concerns on Wall Street of a second wave of infections this winter as people are indoors. It’s unclear what economic impact that second wave would have on an already battered global economy, but Wilson and others think it’s a big enough risk for stocks for investors to pay attention.

Says Wilson, “Until we know exactly what it looks like, further lockdowns here remain a real risk, particularly given the role they could play in deciding the outcome of the U.S. elections.”

Concern #3: The Federal Reserve is a known quantity

By now, the Federal Reserve has telegraphed its next moves on interest rates — no moves for the foreseeable future as a means to help the economic recovery. With the diminishing prospect for further upside surprises from Fed policy this year — which markets always love — Wilson believes stocks have lost a key catalyst.

“Real long-term interest rates appear to have bottomed as rates markets accept what the Fed has been saying all summer about yield curve control,” points out Wilson.

Concern #4: The election

Suffice it to say, the presidential election between incumbent Donald Trump and former vice president Joe Biden is not your average one. The fact that the election outcome may not be known on Nov. 3 is a big risk to markets, contends Wilson.

Writes Wilson, “Can the ballots be counted in a timely fashion? Can the mail-in process be trusted? What about potential meddling via powerful social networks? 2020 has been an unusual year to say the least, and the election is the cherry on top.”

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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