US market trends – what lies ahead at the close of October 2022

[vc_row type=”in_container” full_screen_row_position=”middle” column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” scene_position=”center” text_color=”dark” text_align=”left” row_border_radius=”none” row_border_radius_applies=”bg” overflow=”visible” overlay_strength=”0.3″ gradient_direction=”left_to_right” shape_divider_position=”bottom” bg_image_animation=”none”][vc_column column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_spacing=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” column_border_radius=”none” column_link_target=”_self” column_position=”default” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1/1″ tablet_width_inherit=”default” tablet_text_alignment=”default” phone_text_alignment=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid”][vc_column_text css=”.vc_custom_1666186352989{margin-right: 10px !important;margin-left: 10px !important;}”]There is a proverbial saying in the financial world that “When the US markets sneeze, markets all over the world catch a cold.” This statement defines how deep an impact the US markets have on other global markets and indices. This year has been particularly worrying as the US markets have declined with indices such as the DJIA down by 17%, NASDAQ down by 31.7%, and S&P 500 down by 22.8% since the beginning of 2022.

After the decline from January to August, this was further amplified by a sharp fall in September. One of the historical realities of the stock market is that it typically has performed poorest during the month of September. The “Stock Trader’s Almanac” reports that, on average, September is the month when the stock market’s three leading indexes usually perform the poorest. Some have dubbed this annual drop-off as the “September Effect.”

From 1928 through 2021, the S&P 500 index averaged a 1% decline during the month of September. This is an average exhibited over many years, and September is certainly not the worst month of stock-market trading every year.

The September Effect is a market anomaly and not related to any market event or news. In recent years, the effect has dissipated. Over the past 25 years, for the S&P 500, the average monthly return for September is approximate -0.4%.

The sell-off in the U.S. stock market intensified in September, completely wiping out all the S&P 500’s 2021 gains. The S&P 500 was firmly in a bear market territory at the end of September, down nearly 24% on the year, the lowest level since November 2020. Investors have become accustomed to temporary bear market rallies that are followed by even more severe losses.

The graph above depicts the monthly chart of the DJIA over the past seven years and it has dipped below its 50 EMA only twice in the past seven years. However this assumes significance as historically if the DJIA index closes below the 50 EMA for two successive months, the further months lead to a sharp decline and confirm a recession in the markets. If one looks at the graph, the close in February 2020, just at the outbreak of the pandemic was below the 50 EMA, however the next month, it closed above it headed higher.

Looking at the latest data on the chart, after a sharp fall in September 2022, the close for October is likely to be below the 50 EMA. If October closes below this level, there is a high probability of a sharp fall ahead. This phenomenon last occurred in 2008 during the housing finance crisis.

This can be seen from the graph below. In 2011 also, a similar situation was seen where the index remained below 50 EMA for the most part of the year after closing below the 50 EMA for two consecutive months. Though there was no sharp decline, the index remained flat for almost a year and the monthly closing remained below the 50 EMA for six months of the year.

Midway through September 2022, the S&P 500 plummeted more than 13% over the course of 10 days in a rout that might have felt shocking under more normal conditions. But these are hardly normal times for markets. A lot of the movement is dependent on the Federal Reserves’ stance.

Consider how the Federal Reserve’s stance on inflation has evolved.

Last year, Fed officials said inflation wouldn’t be a problem. Then the Fed promised it would be “transitory.” They viewed it as a “soft landing” for the economy even as they hiked rates and now warning of more economic pain to come as they do whatever it takes to control inflation.

According to market experts, raging inflation won’t be extinguished in October and there’s no Fed meeting until November. Still, October should provide valuable clues about the pace of growth and whether the Fed’s aggressive strategy will push the U.S. economy into recession.

The last seven bear markets in the US have seen an average decline of 40%. While this year’s decline is still well short of that, analysts don’t think we have to approach that level this time. The decline in the mid-’70s was driven by an oil embargo and a painful recession. The early-2000s saw the tech bubble pop get exacerbated by 9/11. The housing bubble and global financial crisis were behind the ’07-’09 decline. Excluding the instances mentioned above, the average decline for the remaining bear markets was closer to 30%, which is not too far from the decline that the US markets have already experienced.

As we approach the closing of October, the charts tell us that history is likely to repeat itself. If the monthly close goes below the 50 EMA, a further downside can be expected. On the other hand, it closes above the 50 EMA, a sharp recovery might be seen in the next two months. Analysts across the world are watching the closing for this month with bated breath. Whichever way the closing goes, we will witness another episode of the “When the US markets sneeze, markets all over the world catch a cold” saga.

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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