Advertisement
investing

Another October Surprise Isn't in the Cards for Investors This Year

My main argument for continued tranquillity in the markets: Interest rates are likely to remain low for the foreseeable future.

October has a larger-than-life reputation for financial savagery. The Panic of 1907, America’s worst-ever bank run, erupted in October. The Crash of 1929 also happened in October. So did 1987’s Black Monday, when the Dow Jones industrial average plummeted 23% in one day. In 2008, with banks and securities firms failing left and right, the Dow shed more than 500 points on four separate October days. That set the tone for the brutal bear market that persisted until March 2009. Although the subsequent bull market is now 7½ years old, some of us haven’t fully recovered yet, either financially or emotionally.

Wait, there’s more. The price of West Texas Intermediate crude traded for $100 a barrel at the start of October 2008. By month’s end, the oil benchmark stood at $68, evidence that when the economy is in big trouble, hard assets are no sure cure. And had the U.S. defaulted on its bond obligations in 2013 (the last time Congress played chicken with the debt ceiling), the Treasury would have missed its interest payments for the first time ever in October. You get the idea.

Advertisement - Article continues below

Now, you might think that this litany of misery is my way of warning that something horrible is going to occur this October, perhaps tied to the peculiarities of the presidential campaign. And with stocks and bonds looking expensive by most historical measures, the next bear market (in both stocks and bonds) could be severe. Income-oriented investors, who have benefited enormously in recent years from the torrid performance of such rate-sensitive sectors as utilities and real estate investment trusts, are particularly vulnerable.

Advertisement
Advertisement - Article continues below

More of the same. Yet despite questions about value, concerns about Brexit and the usual litany of risks, markets have remained remarkably placid so far in 2016. I believe this relative calm will extend into October and continue for the rest of the year.

The main reason for that continued tranquillity: Interest rates are likely to remain low for the forseeable future. (Investment guru James Paulsen disagrees; read our interview with him.) So far in 2016, the yield on the 10-year Treasury bond has swung between 1.35% and 2% (it stood at 1.5% in early August). Although the Federal Reserve may raise short-term interest rates once this year, the yield on the benchmark Treasury won’t zip past 2% anytime soon because the economy isn’t strong enough to support much higher rates. So bond yields are unlikely to rise to the point at which they start pulling money away from dividend-paying stocks, but they will remain high enough to encourage foreign investors and pension funds to keep buying dollar-denominated bonds and bond-like investments.

Advertisement - Article continues below

The gloom-and-doom crowd is left to bellow warnings about the dangers of “reaching for yield” and turn routine business and economic news into signs of impending disaster. Worried about slow economic growth? Yes, growth in U.S. gross domestic product has been lackluster (1.2% in the second quarter), but look at the strength in job creation, family incomes, and the housing and manufacturing sectors. Concerned about corporate profits? Yes, the second quarter marked the fourth consecutive quarter of year-over-year declines in earnings. But a less-robust dollar and the end of oil’s freefall should result in better numbers for the rest of 2016 and 2017. Terrorism? Even the Europeans, who have suffered a lot lately, recognize that the financial markets don’t move in lockstep with current events.

A black swan—an utterly unpredictable catastrophe on the order of 9/11 or the mass bank failures of 2008—can always materialize, leading to severe market losses. But don’t enter the final stretch of 2016, a year that has delivered surprisingly solid gains in both the stock and bond markets, worrying that your returns are a fluke and respond by shredding your investment plan.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Chiropractor Trying to Get Business the Wrong Way – Illegally
careers

Chiropractor Trying to Get Business the Wrong Way – Illegally

A new chiropractor’s fledgling business plan to attract patients may sound reasonable at first look, but it’s actually against the law, and the same p…
June 30, 2020

Recommended

3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing CEFs, you can sweeten the pot even further.
July 2, 2020
Is the Stock Market Closed for the Fourth of July?
Markets

Is the Stock Market Closed for the Fourth of July?

Independence Day falls on a Saturday in 2020. As a result, the bond and stock markets are closed for a long holiday weekend. Here's a look at the mark…
July 2, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
June 25, 2020