Don’t fight the Fed: or should you? 3 reasons to buy stocks in October

A strange week for the US stock market investors just ended. After rallying in the first part of the week, the market gave back almost all gains following the September NFP report.

The report showed that the US economy keeps adding jobs faster than the market expected. Besides reporting more jobs than the market expected, the report also showed that the unemployment rate declined. Therefore, a solid report led to declines in the stock market as the belief that the Fed would pivot faded away.

But a closer look at the September NFP report does show a softening job market, as explained here.

So are investors supposed to wait until seeing a clear sign of a dovish central bank pivot before buying stocks? Or would they be better off buying ahead of the pivot?

Here are three reasons that favor the latter:

The US stock market is in a secular bull market
Rising bond yields should not affect stock market gains
On average, it took the stock market 9 months to recover to new highs during secular bull markets

The US stock market is in a secular bull market

A secular bull market is the definition of a market that delivers prolonged above-average returns for about 20 years. During the period, the upward trend is unaffected by recessions or pullbacks.

Sure enough, recessions or pullbacks do exist. This is the third secular bull market since the 1950s, and it has already had two corrections of over 20%.

But if history tells us something is that 20% corrections and recessions are normal during such markets. For instance, during the 1980-2000 secular bull market, the S&P 500 increased by 1,400% despite the Japanese bubble bursting, the first Gulf War, or the Asian financial crisis, to name a few of the challenges of the period.

Stocks should not be affected by rising bond yields

One argument against the stock market is that rising bond yields would not allow stocks to rally. Indeed, bond yields are on a tear higher – yesterday, the US 10-year Treasury bond yield closed at 3.885%.

US 10-year Treasury bond yield chart by TradingView

And then again, if history tells us something, higher yields are standard in a secular bull market. For example, during the 1950s secular bull market, the 10-year yield ranged between 2.2% and 5.6%. And yet, stocks rallied.

On average, stocks need 9 months to recover to new highs in secular bull market

It takes, on average 9 months for stocks to recover to new highs in a secular bull market.

12) Whereas it took an average of 9 months to recover its previous highs during secular bull markets, the recovery took an average 48 months during secular bear markets. pic.twitter.com/dOCWPw5QVD

— Jawad Mian (@jsmian) September 10, 2022

Considering that the current correction started at the beginning of 2022, it is about time for stocks to bounce.

Who is willing to fight the Fed? History tells us that buying stocks this October should pay off in the medium to long term.

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