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US-China trade talks, earnings season: What to watch in October

Twenty/20

Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

So much for September being the worst month of the year for the U.S. stock market.

Historically, it's the market's weakest month, according to Yardeni Research. But this year, even amid some significant news — the House's announcement of an impeachment inquiry into President Donald Trump and the Federal Reserve cutting interest rates for the second time in a matter of months — September has been a very calm month for U.S. stocks.

On more than one-third of trading days, the S&P 500 barely moved, rising or falling just 0.1% or less. That's about double the index's five-year average for daily swings of such size, according to calculations by Grow.

The benchmark is poised to end the month 1.6% higher and, while boring, it's a nice reprieve after a wild August. But October could revive the stock market, with trade talks between the U.S. and China set to resume midmonth, along with the start of earnings season for third quarter corporate profit results. Here's what you need to know:

Is a U.S.-China trade deal coming?

What's happening: Trade talks between the U.S. and China are scheduled to resume October 10 and 11 in Washington, D.C., and Wall Street will be watching for any progress in this prolonged spat. Whether or not the leaders can agree on some sort of deal remains an open question, and traders have reason to be skeptical it will happen in the coming weeks since talks have been derailed in the past.

Why it matters: The prospect of a trade deal has been one of the reasons traders remain so bullish about U.S. stocks, but with about 13 months until the 2020 presidential election, there's pressure on President Trump to deliver on his promises, says Edward Moya, senior market analyst at Oanda, a brokerage company.

"If President Trump wants to win reelection, he will need to have this trade war become a tailwind," he says. "And that will only happen if he can get some sort of a deal done in the next couple of months."

What's more, the trade war is the biggest threat to global economic growth, according to incoming European Central Bank President Christine Lagarde. And the strain on the U.S. economy means this fall could be "a critical juncture" for Trump to get a deal done to avoid a recession prior to the election, Moya says.

What it means for you: The next round of tariff hikes on Chinese goods is scheduled to take effect October 15, with levies increasing from 25% to 30%. The list of items affected includes furniture, handbags, and luggage, while other proposed tariff increases could make holiday spending more expensive.

With respect to your portfolio, if any sort of deal comes out of the in-person meetings, that could result in a "relief rally" that pushes the stock market higher, Moya says. And Wall Street is more optimistic that could finally happen, he adds. "The big focus in the market is going to be on China."

If President Trump wants to win reelection, he will need to have this trade war become a tailwind.
Edward Moya
senior market analyst at Oanda

Wall Street bracing for slower earnings

What's happening: The multiweek period known as earnings season — when publicly traded companies disclose results for the most recent quarter — kicks off midmonth. Analysts currently forecast that corporate profitability for companies in the S&P 500 declined for the third straight quarter, the first time this has happened since mid-2016.

Why it matters: While the S&P 500 has been flirting with setting an all-time high for weeks, that hasn't happened, which shows there's a lack of confidence among those on Wall Street to push stock prices much higher, says Frank Cappelleri, chief market technician at Instinet, a brokerage firm. What's more, many traders will have October 2018 on their minds — when the S&P 500 tumbled 6.9% for its worst month since 2011 — along with the typical uncertainty surrounding earnings season, he adds.

"There's some concern as to what October might bring," Cappelleri says. And whatever does happen in the month ahead "could be a telling sign" that sets the tone for the rest of the year, he says. Last year, for example, the S&P 500 fell almost 14% in the October-December period.

There's some concern as to what October might bring.
Frank Cappelleri
Chief market technician at Instinet

What it means for you: Earnings season can cause some wild swings in prices of individual stocks, which in turn can affect the broader market. That means if you own individual stocks, your portfolio's value may fluctuate more as a result. And traders will be especially keen to see how the dragged out U.S.-China trade war affected corporate profitability in the third quarter — and any big surprises could spook the market.

The bottom line

Expect news out of Washington — both trade talks and politics — to dominate much of the market news in the early part of the month, followed by earnings season for the latter half. While October has long had a bad reputation with investors because of past market crashes, notably those in 1987 and 1929, it's important to note that it's actually experienced positive returns, on average, according to data from Yardeni Research.

And regardless of what happens in the coming weeks, don't make any changes to your long-term investing strategy based on short-term events. The market's performance this year — with the S&P 500 up about 18% — is a reminder to take a long-term view and stay the course.

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