The mere mention of October is enough to frighten some investors, while others wonder, “What’s the big deal?” Sure, five of the stock market’s worst 10 days happened in October but overall, it’s a pretty average month for the market.
Instead, the history lessons to turn to this month are about infrequent events such as the U.S. midterm elections or when stocks appear mispriced. Here’s what investors will be watching:
About those elections. Investors are already betting on a split Congress, with Democrats possibly taking over the House. If Democrats were to gain control of both the House and Senate, that might rattle the market, said Craig Hodges, chief executive at Hodges Capital Management, which oversees six mutual funds.
Since 1946, the S&P 500 has never declined in the 12 months following midterm elections, Hodges said, citing research he has conducted. What’s more, the S&P 500 has seen an average fourth-quarter return of 7.9 percent during midterm election years, he adds.
But don’t be surprised if the stock market hits a temporary rough patch before then. “We certainly could see some volatility going into the elections,” said Matthew Etter, owner of Signet Financial Management, a registered investment adviser. That would be a departure from a relatively calm market recently.
What to do: While midterm elections could boost the market, there’s another important reason for optimism: Economic growth is solid. For Hodges, that further supports being fully invested by November, not keeping cash on the sidelines. “Any dip I would use as a real buying opportunity,” he said.
Hunt for value. Remember back in January and February when the market fell 10 percent in a matter of days? The S&P 500 fully recouped those losses by August, and the Dow Jones industrial average did so in September.
What has been good news for your portfolio has some investors feeling squeamish about investing when stock prices are high. But perspective matters, Hodges says, and some stocks look downright cheap. “There are more mispriced stocks in the market than I’ve ever seen before,” he says.
It all boils down to the two fundamental styles of investing: value (focusing on stocks that are undervalued by the market) vs. growth (seeking stocks that deliver better-than-average returns). Growth stocks have largely been this year’s “highfliers,” while value stocks are lagging behind the performance of the broader indexes. The performance differential for these different styles has become “overstretched,” which creates opportunity for long-term investors, Etter said.
Among the largest 1,000 U.S. stocks, the index tracking growth stocks has soared nearly 16 percent this year while the index tracking value stocks is up just 2 percent. Similarly, small-cap growth stocks have jumped more than 15 percent year-to-date; value stocks have risen 5.7 percent.
While it may be tempting to continue investing in the best performers, Etter said: “History has shown us that we don’t spend our entire life in a growth cycle.”
What to do: Investors looking for a tactical approach can prepare for this type of market change now by buying value stocks. Hodges sees fertile opportunities for stock-picking within small-caps, and in industries such as industrials, energy, homebuilding and transportation. Etter says exchange-traded funds offer an accessible way to attack this strategy.
Stock market forecast. Much has been made of the long shadow of the 2008 financial crisis, in light of its 10-year anniversary. Various surveys have shown that investors remain spooked.
And my, what noninvestors have missed. The S&P 500 has more than doubled in the past 10 years. That’s why the stock market remains attractive for buy-and-hold investors.
As for the outlook ahead, professionals on Wall Street forecast the S&P 500 will end the year slightly higher than its current level — up 1.7 percent, to be precise, according to the average forecast of strategists surveyed by CNBC. Still, there’s near-daily talk of an imminent market crash among other prognosticators.
Yes, you can prepare for a market crash, but when one strikes, your emotions could get the better of you. That’s why many investors prefer to remove emotion altogether by working with a financial adviser — either of the human or robo-adviser variety.
If you are navigating investing on your own, there are simple steps to take:
• Don’t try to time the market (sell when you think the market is at its peak).
• Add money to your investments regularly. This strategy, known as dollar-cost averaging, smoothens out your purchase price over time.
• Diversify your holdings across a variety of assets to reduce your overall risk.
• Accept that volatility is inherent to investing, but not something to stress about for long-term investors.
Anna-Louise Jackson is a writer at NerdWallet. E-mail: firstname.lastname@example.org. Twitter: @aljax7.