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Jensen: October Appears Bearish

There's more inflation and volatility ahead.

Investors should prepare for more volatility because the outlook for October is bearish, Real Money’s Bret Jensen argues.

Weary investors already faced a challenging month  in September as the S&P 500 fell 4.8%, the worst month of performance since the pandemic month of March 2020 The Nasdaq plummeted even deeper at nearly 5.5%.

Economic growth is not only slowing down, but the impact of inflation is more wide ranging, Jensen wrote in a recent Real Money Pro column. “Investors increasingly woke up to the fact that inflation is neither ‘temporary’ nor ‘transitionary,’” he wrote. “Economic growth forecasts were slashed during September as the global economy continues to be plagued by supply chain disruptions, surging prices and poor policy decisions.”

The equity market is also being influenced by the upward trend of interest rates which rose during September. The 10-Year Treasury yield now is 1.5% and 30-year mortgage rates rose to above 3%.

“This fully fits the Stagflation Lite theme I have been banging the drum on for months now,” he wrote. “I expect interest rates to continue to move higher, which will hurt growth stocks as discount rates rise as well.”

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Value stocks will likely benefit as well as the stocks of banks due to improving net interest margins. Investors could also see energy stocks rally because crude oil and natural gas prices are expected to rise.

A rebound in the market in October is not likely, Jensen argues.

“It is hard to see much relief for investors in October -- a month that will be highlighted by increasing political risk on top of everything else the economy is dealing with,” he wrote. “There is the continuing debt-ceiling fight.”

The bottleneck of the two massive spending bills that are winding their way through Congress will also weigh on market sentiment.

Investors should “buckle up for another tumultuous month,” Jensen wrote. “My plan is to continue to keep just over 25% of my portfolio in cash and hold most of my positions within covered call holdings to help mitigate downside risk. This strategy produced right at a 2% loss for me in September. While I hate to see red for a month, it was certainly much better than the overall markets delivered.”

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