October – historically a spooky month for stocks – wasn’t too scary this year.
An ominous cloud typically hangs over the market in October due to the stockmarket crash of 1929, Black Monday in 1987 and the 2008 financial crisis, but stocks bucked the trend this time around.
Despite Thursday’s losses, the Dow Jones industrial average rose 1.8% for the month and put the blue-chip average within striking distance of a fresh all-time high. The Standard & Poor’s 500 index hit a record on Wednesday, ending October 3.3% higher, with the index up 21% in 2019. The Dow has climbed 16% so far this year.
“It’s unusual and surprising that we’d be trading at a new all-time high in October,” said Andrew Crowell, vice chairman of wealth management at D.A. Davidson. “But there are signs of optimism that this trend could continue for several more years.”
What’s next for markets in 2019?
The previous seven occasions when the Standard & Poor’s 500 rallied more than 20% year-to-date through October saw November and December tally gains seven times and six times, respectively, according to LPL Financial.
With the broad index back at record highs, some investors are wondering what it would take to derail the decadelong bull market. The answer may lie with the force that powers the U.S. economy: American consumers.
Major stock averages have rebounded this year after fears about a global slowdown battered stocks at the end of 2018. American shoppers have remained resilient, underpinned by a strong labor market and lower interest rates.
Strong consumer spending habits have helped ease investors’ fears about a possible recession. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, remains a pillar of domestic growth as other areas of the economy waver and global growth slows.
“It’s unprecedented for there to be this much negative sentiment at the same time as stocks are hitting new highs,” said Keith Buchanan, portfolio manager at GLOBALT Investments. “A strong consumer has helped soften the blow.”
Holiday shopping season is key
Now investors are looking ahead of the crucial holiday shopping season as Wall Street continues to grapple with signs of a diverging U.S. economy. The manufacturing sector has struggled with headwinds related to the trade dispute between the U.S. and China. Meanwhile, the labor market continues to grow, but the pace of hiring has slowed from last year.
A strong consumer, lower rates and optimism about the tariff spat between Washington and Beijing could give stocks more room to run in the final months of the year, some analysts say. Stocks could also benefit from the Federal Reserve, which signaled Wednesday that it would monitor the economy to assess future interest rate decisions.
What retirees and millennials should do
With stocks poised to march higher through the end of the year, that means a potential boost to your retirement savings. One thing is clear among financial advisors: Don’t back down from contributions to retirement plans. In fact, if the market dips, you should be allocating more from your paycheck, they said.
“No one knows when this market will end or a recession will hit,” said Bill Van Sant, senior vice president and managing director at Girard. “But in the end, an allocation toward investments in stocks and bonds will give you the better chance of generating a return that will allow you to live off your nest egg longer.”
He added that if the market starts raising red flags and the economy heads toward a recession, “that’s when you want to be boosting your contributions to those vehicles so that you’re acquiring more of these assets at a cheaper price.”
For those approaching retirement, Van Sant recommends that clients allocate about 60% of their portfolio toward stocks and 40% toward fixed income, which is perceived as more conservative. If they are ten years into retirement, he suggests allocating about half of their investments in stocks and the other half in bonds.
When it comes to millennials, he suggests being fully invested in the stock market since they have a longer investment time horizon and can take on more risk.
What could derail this market?
Some risks remain. Concerns about a breakdown in trade talks, coupled with the potential for a further slowdown in corporate profit growth could pose a threat for stocks in the near term, some analysts cautioned. Any signs of weakness in consumer spending could also lead to more risk that the market could fall, they said.
Recent signs point to continued strength for the economy. The pace of U.S. economic growth slowed slightly in the third quarter, but robust consumer spending and a firming housing market kept the economy humming along.
With that in mind, even though stocks are back at records and up strongly this year, the market is still little changed from where it was in early 2018. Stocks have battled multiple bouts of volatility over the past 18 months, suffering bruising downturns at the beginning and end of 2018 on global growth fears, only to rebound. But major indexes have struggled to break out of a narrow trading range.
Investors received good news Friday. U.S. employers hired at a better-than-expected pace in October, a sign that the labor market remains strong. The economy added 128,000 jobs last month, the Labor Department reported, easing recession fears.
“If there are any signs of weakness in consumer spending and an uptick in unemployment in the coming months, that would lead to more downside risks for the market,” Buchanan said.
