So long, September, and don’t let the door hit you on the way out. Last month was particularly brutal for investors. The Dow tumbled 8.8%, the S&P 500 fell 9.3%, and the Nasdaq slid a cold 10.5%. Last Friday was also the final day of the third quarter, and it was the first three-quarter losing streak for the S&P 500 and the Nasdaq since 2009, losing 5.3% and 4.1%, respectively. The Dow dropped 6.7% last quarter—its first three quarters in a row of losses since 2015. The S&P 500 is now down 24.8% year-to-date. Since World War II, only 1974 and 2002 saw worse starts to a year, but both years saw the S&P 500 gain 7.9% in the fourth quarter.
We’re seeing moves in Treasury prices and yields we haven’t seen in 15 years—back when the global economy was heading into a freefall. The one, two, three, five and seven-year Treasury yields all closed above 4% last Friday. The last time that happened was in October of 2007. Corporate bond yields spiked as well, with high-yield corporate bonds offering 9.33%—that’s the highest yield since April of 2020, while investment-grade corporate bonds are yielding 5.62%—the highest level since August of 2009. Those are all signs of intense fear and uncertainty among investors. They see those higher interest rates coming, and they are losing confidence in the Federal Reserve‘s ability to thwart a recession. As one money manager put it to me last week, the Fed’s mindset now is “whatever it breaks,” not “whatever it takes” to bring down inflation. And that leads us to our Big Three for the week.
October is known as a bear market killer. We’ll get into more of that with Ryan Detrick in a few minutes. But the gist of it is that following terrible Septembers, when the S&P 500 declines 7% or more, the market rises about 0.5% on average in October, and sees a median gain of 1.81%. That’s better than the average for all Octobers. October is positive in years following an outside September loss 54.55% of the time, versus 57.45% of the time for all Octobers. In addition, the best October returns have historically occurred when the S&P 500 starts the month below its 200-day moving average (MA), and that, my friends, is currently the case.
Now we know that past performance guarantees absolutely nothing, and we shouldn’t build our investing strategies around monthly patterns alone. And, to be sure, some of the darkest days in the market have occurred in October, which gives my favorite month its own term page on Investopedia: the October Effect. There was the Panic of 1907, Black Tuesday in 1929, Black Thursday—also in 1929, and Black Monday in 1987. Those were terrifying days that happened to fall in the tenth month of the year. But it’s also important to remember that October is also the last month of the worst six months of the year, on average. The returns from November to April are historically much stronger. Investors will be put to the test this month with third-quarter earnings reports, and waves of uncertainty crashing all over the planet.
Meet Ryan Detrick
Ryan Detrick, CMT, is the Chief Market Strategist at Carson Group, a Registered Investment Advisor (RIA)—a position he has held since July. Prior to joining Carson Group, Ryan was Chief Market Strategist at LPL Financial, where he worked for six years. Ryan is also a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Prior to joining LPL Financial, Ryan was a senior portfolio manager at Haberer Registered Investment Advisor, Inc. Earlier in his career, he spent more than ten years at Schaeffer’s Investment Research; during his time as the company’s primary spokesperson, he appeared in several national media outlets, including CNBC, Bloomberg TV, and Fox Business.
What’s in This Episode?
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We know the stats. We know the issues. We know we have to have perspective when we are in bear markets. But it still doesn’t make it any easier on our psyches as investors. Our flight-or-fight instincts are raging right now as we contemplate the prospect of more losses, a recession, a long and painful bear market, and all the nastiness that comes with it. You know what I do when I feel this way? I seek out Ryan Detrick’s feed on Twitter, or I go directly to his blog and I take the elevator to 50,000 feet, to see what Ryan sees. And you know what? It makes me feel better, smarter, and more equipped to handle the market turbulence. Ryan, in one of the biggest free agent signings since Kevin Durant was picked up by the Golden State Warriors back in 2016, is now the Chief Market Strategist for the Carson Group. He’s a fan favorite here on The Express, and a good friend to Investopedia. Welcome back to the show, Cincinnati’s finest, Ryan Detrick.
Ryan: “Hey, Caleb. You just compared me to Kevin Durant! I’m not sure if I’m in that league, but that’s an honor, and I’m glad to be back. I think I’ve been with Carson Group, as their Chief Market Strategist for about two months now, approximately. And I’ll just say this—they’re a large RIA, almost a fintech company. We’ve got over 300 advisors, and you and I hung out a couple of weeks ago in Vegas at one of our big conferences called Excel. I’m loving it. I think I’m in the place I should be the RIA space, and I am having a blast. I’m just glad to be back with you, man.”
Caleb: “We’re talking on the final day of the third quarter—thankfully, because it’s been one of the worst quarters for stocks and bonds since 2020 and 2008. And the fourth-worst three-quarter start to a year in the history of the stock market, right? No big deal. You put out a great blog this week: Ten Answers to Questions About Bear Markets. We’re going to link to it in the show notes. But I want to dig a little bit deeper with you on a few of those answers. Are you ready?”
Ryan: “I think so. Let’s give a shot; let’s do it!”
Caleb: “You wrote it. So you ask this question, “Why shouldn’t I sell everything right now?” I think a lot of investors are asking themselves that question. Now we know—and we counsel folks here—you don’t sell in the middle of a downturn or when things seem so desperate—that’s not the right play. But for folks who are like, “I just don’t like the prospect six, 12, 18 months out,” what do you tell them?”
Ryan: “Yeah, well, I mean, that’s the past, right? What’s the market doing? It’s looking forward is the first thing. I’ll put it like this, Caleb. I think I maybe talked about this with you, when I was on the show last time, a while back. Midterm years, historically, aren’t that great—at least the first three quarters. Now I get it: this quarter is worse than probably most people expected, including me—this year so far. But again, a weak midterm year is not out of the ordinary. What also isn’t out of the ordinary, is a pretty good bounce in the fourth quarter of a midterm year. October is the best month of the year during a midterm year. Oh, and by the way, when September gets killed like it has this year, October actually does even better.”
“So another thing I think about October, for listeners and people who follow market history—October is called a bear market killer. You look at history: ’74, 2000, 2011, ’94, ’98—there have been a bunch of big bottoms, if you will—bear market killers in the month of October. In fact, there have been six different bear markets that ended in the month of October, out of the last 17 bear markets. Now, maybe it’s random, maybe it’s not. I don’t think so, because historically, August and September can be rocky, and then you can make that low, then the feel-good time of the year—the fourth quarter—can come in.”
“One more thing, and then we can talk a little more here, and then you can ask me that question—but why should someone hold now? They just got decimated—really, really decimated in some cases, right? This has been one of the worst years for a 60-40 portfolio we’ve ever seen—60% stocks, 40% bonds. Bonds are down by a lot. Usually when stocks are down, bonds are up. We’re not getting that this year. But you just look at things like market sentiment, right? Put-to-call ratios are finally starting to get to levels we’ve seen at major lows; the latest AAII sentiment poll had 60% bears two weeks in a row, for the first time in history!”
“People are scared, and rightfully so, but when everyone’s on one side of the boat, opportunity can be there. Believe me, it doesn’t feel like there’s much opportunity here, but I’ve used this quote before—maybe on this show: “the stock market’s the only place things go on sale, and everyone runs out of the store screaming.” For longer-term investors, there are some incredible companies that are on sale— doesn’t mean the lows are in—but are on sale, so that one, three, five years from now, this is probably going to be an opportunity, and it’s going to help people reach their long-term investment goals by not panicking here, but by using it as an opportunity.”
Caleb: “It’s not like it means that we should go back to the recipe that was working for us the past 10 or 15 years, because we were in a very low interest rate environment. We had this incredible run of great growth tech stocks, mega-cap tech stocks. Some of that may work, but you got to look and think a little bit differently about where we are, in terms of the economy right now, what the projection is going forward. So it’s not like the old recipe is going to work this time around. Am I correct on that?”
Ryan: “No, you’re right. I mean, that’s one of the things. I share a lot of stats and figures, and sometimes I share them because I think they’re interesting. And one of the number one replies is, “Yeah, but…” Remember that the four most dangerous words are “this time is different,” as Sir John Templeton said. But it kind of is, because the Fed is aggressively hiking. And it’s not just the Fed, it’s central banks all around the globe, excluding China and Japan. So clearly, the punchbowl has been taken away.”
“Now, I’ll just say this about the Fed—I’m not a Fed basher or a Fed apologist—I like to think I’m looking down the middle here. In June of 2021, the Fed, when you look at their dot plots, right?—they were looking at maybe one hike this year. One hike. That was in June of 2021. Instead, we’ve had the most aggressive rate hiking that we’ve ever seen so far this year, fastest up over 3% ever. So the Fed’s not perfect, and now the Fed’s all hawkish. We get it. Even Kashkari, the biggest dove, who was almost making fun of the idea that there could be inflation at this time two years ago—now he’s buying in. Believe me, Kashkari is smarter than I’ll ever be—I’m just saying, everyone’s now on one side. The Fed’s not always right, is what I want to say.”
“The PCE number came in a little hot, we’ve seen some sticky inflation data. But still, we’re optimistic that if inflation does start to roll over—and we think it can—look at energy prices, look at chicken wings, look at rents. Rents are finally starting to slow down a little bit. Now, rents take like six-to-nine months to even make their way into the inflation data. So we think there’s some good signs that inflation’s going to start coming down, and that could be the positive for the Fed, that is super-hawkish now, just as dovish as they were a year or two ago. And the bottom line is that.”
“It was almost a full year ago in November 2021—November is when the Fed finally turned around and became a little more hawkish, and then we all know what happened since then. But I just don’t think the Fed is as perfect as people think. So believe me, the market is the market, the market is what matters when you get your statements, I get that. We get that. But, the Fed could very well change your tune six months from now if inflation comes back down. And that’s our base case.”
Caleb: “Different story, different narrative, different continent—but we just saw the Bank of England (BoE) change its tune, maybe after a policy goof, deciding that they were going to become a buyer of bonds again just after they had a big rout in their bond market, given the announcements from the Truss administration. But is there a moral hazard out there? And I think a lot of people argue that there may or may not be, where if things do get much worse, the Fed is going to reverse course just so the capital markets don’t melt down like they did back in 2007, 2008. Do they have to come to the rescue?”
Ryan: “I think they might have to. I mean, their job is price stability, right? I mean, we’re seeing some of the most forceful price rises we’ve ever seen. So they might kind-of have to do something there. It doesn’t mean they’re going to start immediately cutting rates, I don’t think. I mean, they can do some different things—Operation Twist, back in the day, no one quite saw that coming. Maybe they’ve got something in their toolkit that they could dust off, if that needs to happen.”
“But I’ll tell you, if you don’t believe me—the economy, the housing market is changing. You could argue the housing market is in a recession. Manufacturing’s teetering with a recession. Services numbers haven’t been all that great. But then you’ve got employment strong, you got industrial production strong, and honestly, the consumer—as bad as things are—still out there spending money, and still looking pretty healthy. So we do not see a recession. Now, believe me, the inverted yield curve—the last eight recessions all had an inverted yield curve ahead of time. Sometimes it took a couple of years for that recession.”
“So sure, the Kevin Durant thing—the shot clock has started here on a potential recession. Doesn’t mean it’s tomorrow, but look at credit spreads, investment-grade corporates, high-yield bonds, some of those things—they’re not blowing out. I’m honestly surprised they’re not blown out. The credit markets are still fairly calm. They’re a little yellow, maybe not quite red, but we’re not seeing a major monster under the bed, which is kind-of shocking to me, but it is what it is.”
“And one final comment here—you mentioned bear markets, right? Yeah, down about 30% on average. But if you don’t have a recession, the average pullback in a non-recessionary bear market is 24%. As of the time we’re recording this, we’ve already pulled back about 24%. There could be a little more pain, I’m aware, but it’d be very, very rare to see a 30% bear market if we don’t have a recession. It’s happened once before: in 1987, when we had a very stretched rubber band, up 40% for the year by August of 1987. By the way, remember sentiment? We had the least number of bears in history in the same AAII poll I cited earlier in August of ’87. Now we’ve got the most bears in history, two weeks in a row. So think about that when you think about sentiment.”
Caleb: “And think about the fact that 1987 or 2008—we’ve come a long way since then, there’s so much information. Investors are constantly hearing the drumbeat around recessions, bear markets, and I think that contributes to the psychology. But, you are the Chief Strategist for Carson Group, and Carson Group has a huge network of registered investment advisors across the country that are dealing with individual investors like me. So, a lot of them have taken money out of the market or put it somewhere safe, whether it’s the dollar, U.S. Treasuries, whether it’s somewhere under the mattress. Do you get the sense that a lot of the clients in the Carson network want to put money back to work, but they’re just waiting for the fat pitch?”
Ryan: “Probably a good point there, and that’s true. I think that’s different than what a lot of people are saying, and why we’re seeing this. And, you know, what’s the fat pitch? That’s the big question. And I guess you could say the pitch is if inflation really starts to roll over and the Fed can become a little bit more dovish, that could be what we want to see.”
“But again, you mentioned the dollar. I mean, my goodness, if you ask me what’s been the biggest surprise this year, the dollar strength is the one thing. This is the best year the dollar’s ever had; 1997 was the other year where the dollar was kind-of in this ballpark, and that was the Asian Financial Crisis and some major problems. Now, stocks did okay in ’97, but they started to get pretty volatile afterward. So there’s definitely some scenarios with the dollar being surprising. But at the same time, what we’re trying to stress to our partners and our advisors—and this is cliche, you and I know—but it’s a marathon, not a sprint. If you’re going to sell, right now, to get out and go into gold, or go into the dollar, or go into cash, you better have a good plan there to get back in. Because again, this beach ball is really, really under the water. Once it can get going, it can get going.”
“There’s one more quote on this—it’s a midterm year. We knew coming into the year that midterm years aren’t that great. We also know that one year off of the lows of a midterm year—and I get it, no one knows when that low is, could be early October for all I know, maybe will be. But one year off of those lows, the S&P 500 is up 33% on average, higher every single time, so just be aware of that—one year after a midterm election, all right, every year since World War II. So that first week in November, stocks are higher every single time, up 14% on average—some of those years it’s not up a ton—I get it, but the seasonals are there. One more—and I can go all day on this stuff—one more statistic on this. You look at a new president—in the second year for a new presidency, the S&P 500 is up only 2% on average—by far the worst year. You know what the best year is? It’s the third year into the presidency, up over 20%.”
“And I get it—everyone’s worried about a recession next year. Totally can’t disagree with it. Maybe we’ll have a mild recession next year. I’ll just say this. Maybe there’s a permanent belief for the economy, that recessions are not good. But from a stock market point of view, if we have a mild recession, that’s kind-of what’s being priced in. The Fed is talking about that, without saying it in essence. We’re pricing in at least a mild recession, maybe even a good-sized recession right now. So if it’s a mild one, that could be something that the market thinks positively about, because then we can look into the future, which is more growth down the road.”
Caleb: “Right. We do have earnings season coming up in a few weeks here. It’s not going to be good. The outlook’s not going to be good. Companies from FedEx all the way down are already warning about it. Nike is oversupplied. Everybody’s having their issues and it seems to be cleaning out the dirty laundry right now. Are investors pricing that in, or is this wave of bad news that’s going to come in the next four-to-six weeks going to be the other gut punch that takes us a leg down, potentially?”
Ryan: “Great question there, my guess is you’re the glass-half-full type of guy. I think a lot of it is probably priced in. I mean, you mentioned FedEx and it’s interesting. So FedEx has been around since, I believe the mid-seventies. That stock’s been cut in half four times. Every time there’s been a recession, their stock was just cut in half. Again, not a recommendation on FedEx, but just something to be aware of. But then is it company specific, is it not? UPS has the same issues that FedEx has, so believe me, there’s different ways to look at it.”
“Going back to earnings here, you know, we’ve absolutely seen some earnings estimates cut. But, you know, earnings estimates for this year, 2022, are exactly right where they were at the start of the year. We had earnings estimates go up early in the year, and now they’re coming back down a little bit. So it’s not like we’ve had this major shift in views on earnings. But again, what corporate America has to say will be interesting, and—like always—we’ll see some winners and some losers, some big blowups and successes when it comes to earnings season. But we’re still pretty optimistic—the consumer is still quite healthy here.”
Caleb: “Let’s get to the future, because I love looking at the future with you. What happens once the bear market is over? We don’t know when it’s going to happen, but typically good things are on the other side of these.”
Ryan: “Well, that’s right. You know, the Dow has been trading since—I think it’s May 24th, 1896. The Dow has come back to a new high every time. We don’t think this time is going to be much different. But the way we’re positioning our portfolios for our advisors, at Carson Group on the investment team is this: we still prefer value over growth. We still see some issues with growth being a little overvalued. There could be a slip-up with growth earnings, technology specifically. So we have a two-pronged approach. Yes, we still like some of the defensive areas, utilities and consumer staples, because who knows what’s going to happen.”
“But on the other side of things, your industrials and energy—those are some nice groups that we think can do well if the economy can come out of this and start to grow, and the bear market ends. So we’re overweight value—and I’ll say also—just the U.S. In our tactical models, we are even-weight when it comes to stocks. But when we look around the globe in our tactical models, we’re overweight the U.S., relative to developed international markets, relative to emerging markets. So we still think the U.S. is the place to be, and we still side with value here over the next 12 months, in line with that two-pronged approach.”
Caleb: “You touched on it earlier, but let’s button it up a little bit. Is the Fed going to break something here? They don’t seem afraid to do it—they’ve warned of pain coming ahead. They know what higher interest rates mean for households, especially lower-income households. But they also know how bad inflation is for lower-income households, too. But are they going to break something here? It’s going to be a hard landing, but are we going to have some broken bones?”
Ryan: “Might break a leg on the way down, I guess you could say, but hopefully we survive it. And I’ll put it like this—what usually happens, right? We have that dollar strength. The problem is overseas, right? We’ve had the issues overseas, and what just happened—with the pound and what’s taken place with our friends over in the U.K.—that’s where problems start. And as John Connally said in 1971—he was in charge of the Treasury at the time—when we severed the dollar from gold, he said “It’s our currency, but it’s your problem.” That’s been the Fed’s opinion—and the U.S. opinion—about debt and our currency for a very long time. So we’re kind of upsetting the apple cart overseas right now, with what’s going on, potentially with some of our policy. But I think we’re still optimistic—the Fed does not want to repeat 2008, and maybe they can take the foot off the gas a little bit. And that could be viewed as a positive here, as we head into 2023.”
Caleb: “Yeah, never has the Fed—well, I would say never—but never has the Fed had this much scrutiny and this many eyeballs on them, just because there’s more eyeballs out there. But every decision, every data point actually matters. You know, we used to just blow through the CPI and the PCE numbers. Now, that’s dinner table conversation. So everybody’s thinking about it. Just as we wrap up here, Ryan—and I so appreciate your counsel and your perspective—if there’s a few words or a term, an investing term that investors should embrace right now, what’s so important? Besides patience, how would you counsel individual investors? What is the investing term or formula they need to be thinking as they approach the end of the year, and they’re just trying to shake themselves out of this grip of fear that we’re all in.”
Ryan: “Yeah. I guess volatility is the price of admission, is what I’m thinking of here. I mean, you know, we all were spoiled with the 120% rally off of the COVID lows. But markets don’t always go up; they don’t always go down either, right? these things take time, and when you have a rally like that, you can have a correction and use it as an opportunity to reach your long-term goals. And the other thing, have a plan in place before it happens. Eisenhower said plans are useless, but planning is everything. Have a plan. If we start to rally here, don’t let the market just go away from you, right? There could be more of a rally. And if there’s more weakness, what are you going to do? Don’t react in the moment. Have that plan in place ahead of time. And that’s easier said than done, I’ll admit. But again, if you do it, things will be a lot easier for you.”
Caleb: “I couldn’t agree more, and I’ve been through enough of these to know that when it starts to smell like things are changing, you’ve got to have that plan in place. You’re so good at counseling investors on that, and some great advice coming out of the Carson Group in general. Ryan Detrick, I feel better. I’m so glad we got to talk and share your perspective with our listeners. So good to see you, my friend. Congrats on your new job, and welcome back to Cincinnati.”
Ryan: “Thank you very much. I feel better too, because the Bengals started 0-2. Now we’re 2-2, and we’re over the Super Bowl hangover. Now let’s hope the stock market can get over the hangover and start following the lead with Joe Burrow.”
Caleb: “Here’s to a winning season. And so good to see you, my friend. Thanks for joining the Express.”
Ryan: “Thank you.”
Term of the Week: Pricing In (Discounting)
Caleb: It’s terminology time. Time for us to get smart with the investing term we need to know this week. We just heard Ryan Detrick’s favorite term of the moment, but Tim reached out to us at our email podcast at Investopedia.com, and he says he’s always hearing the phrase “is priced in.” For example, “the dividend is already priced in.” How do you know when something is “priced in,” and what does that mean, he asks? Well, great question, Tim. It actually means a few things, so let’s break it down.
According to my favorite website, when we say that something is priced into a company’s stock price, we mean that investors are pricing the stock, and taking into account all of the factors that will affect the company in the future. That’s also referred to as discounting the price of a stock, given the foreseeable future. That foreseeable future could include good or bad news on the horizon, like a recession, a change in pricing, increased competition, rising or falling margins, things like that.
As for “pricing in the dividend,” we think you might be referring to what happens to stock options when a company pays out its dividend on the ex-dividend date—that’s the first trading day where an upcoming dividend payment is not included in a company’s stock price. Stocks generally fall by the amount of the dividend payment on the ex-dividend date. This movement impacts the pricing of its options. Call options, for example, become less expensive leading up to the ex-dividend date, because of the expected fall in the price of the underlying stock. As this happens, we say that the decline in price for those call options is already priced in, and that it reflects the upcoming decline in the company’s actual share price. Great suggestion, Tim. A pair of hot new Investopedia socks are coming your way, just in time for corduroy season.