Why Analysts Say October Is a Key Defining Moment for US Stocks

Journalist:
September 27, 2019

The U.S. stock market is set to see a renewed rally as the U.S. and China reopen trade deal talks for October after what has been a relatively strong month for most U.S. stocks in key industries.

According to CNBC, individuals close to the trade deal talks have said the new round of discussions will begin on Oct. 10 to 11 in Washington, D.C., potentially pursuing a partial trade deal following the demonstration of goodwill gestures by both sides in recent months.

U.S. stocks and the stock market are holding up strongly despite impeachment inquiry, as investors anticipate a trade deal | Source: Yahoo Finance

While most of the progress of the trade deal talks could be priced into the market, as Harris Financial Group managing partner Jamie Cox noted, the U.S. stock market and many markets in general, especially in Asia, have become more interested towards the trade deal approaching October.

“Markets are way more interested in a trade deal with China. Now that Congress is deadlocked into impeachment, the president can close a deal with China to boost the global economy into 2020, just in time for ballots to be cast,” Cox stated.

President Trump confident China wants a deal, Goldman Sachs anticipates big stock volatility

Goldman Sachs equity derivatives strategist John Marshall said that October is a key period for U.S. stocks and the global stock market as historically, it has shown large price movements based on major earnings reports.

Coincidentally, the important earnings report month is to be met with significant progress in the trade talks, possibly even a partial deal if the discussions continue to move to the route President Trump had previously planned.

Marshall said:

“We believe high October volatility is more than just a coincidence. We believe it is a critical period for many investors and companies that manage performance to calendar year-end.

Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and management gives guidance for the following year. Not only are earnings day moves rising relative to average daily moves, but October tends to be the quarter with the largest absolute earnings day moves for U.S. stocks.”

October could establish a precedent for the price trend of U.S. stocks and the stock market heading into 2020, which is likely to result in large volatility based on the performance of the U.S. stock market throughout the past several years.

With rising interest from markets towards the trade talks, a deal would eliminate the likelihood of a trend reversal to the downside, dismissing fears of a recession in the next 12 to 24 months.

However, recession fears still remain a variable for U.S. stocks as surveys from major financial institutions in the likes of UBS suggest that the wealthy are still considering the possibility of a recession occurring within the next two years.

Recession fears are one of the only remaining variables

The impact of the impeachment inquiry submitted by the Democratic party on U.S. stocks has already started to diminish and the Federal Reserve is expected to engage in additional interest rate cuts heading into 2020.

The remaining major variable that could serve as a roadblock in the short- to medium-term upside movement of the stock market is the growing fears of recession triggered by a slowing global economy and the trade dispute between the U.S. and China.

“Recession concerns continue to temper investor risk appetite as 38% of Fund Managers in latest BofAML survey expect a recession over the next 12mths vs 59% who see a recession as unlikely, the highest net recession risk since Aug’09,” Holger Zschaepitz, a market analyst at Welt, said.

The result of the trade talks in October is likely to affect the stance of investors and strategists towards a possible recession and as such, October is shaping up to be a critical month for stocks.

This article was edited by Gerelyn Terzo.

Joseph Young @iamjosephyoung

Hong Kong-Based Finance Analyst. Contributing regularly to CCN and Hacked. Providing unique insights into the fintech space since 2012.