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Epic Economist, 10/9/23
"The October Stock Market Crash Is
Rapidly Accelerating With 50% Value Drop"
"October is known as the spookiest month for Wall Street, and the market movements of the next few weeks are going to serve up an extra dose of terror for traders. Since September, conditions are getting turbulent for the S&P 500, which shed almost 6% during the month. Several calculations suggest that the index is about to drop below 3,000 points in October – which would be at least a 30% crash from current levels. But market insiders point to a myriad of factors that could send share prices even lower. They say a 50% crash would not be ‘unsurprising’.
The feeling is changing so rapidly on Wall Street that two important market indicators are showing that investors are sitting on the edge of their seats. On Thursday, CNN reported that its Fear & Greed Index, which tracks seven market indicators, sank to an “Extreme Fear” reading of 14, which marks the index’s lowest level since last October.
And they are right to worry because, right now, U.S. stocks are on shakier ground. The Federal Reserve just warned that it will keep higher interest rates for longer, which is raising concerns about whether or not the U.S. economy can stay resilient. Many signs of trouble are brewing. Investment bank Raymond James said on a note to clients that the U.S. economy is set to enter an inflection point as soon as this quarter. JPMorgan also predicts a rocky few weeks on Wall Street.
The so-called Magnificent Seven stocks—Amazon, Alphabet, Meta, Apple, Tesla, Microsoft, and Nvidia—would be particularly hard-hit in such a scenario, sparking high double-digit losses as they catch down to the rest of the stock market and sectors like consumer staples and utilities. In the past few days, many other financial strategists started to raise the alarm about the imminent danger of an October crash. Notably, Albert Edwards, a global strategist at investment bank Société Générale, warned that markets were currently mimicking the run-up to 1987’s stock market crash.
The outlook today is eerily similar to the run-up to Black Monday when stocks were resilient amid rising bond yields right before the Dow crashed by 22% in a single trading session, its sharpest one-day decline in history, the strategist cautions.
Goldman Sachs and Citigroup also seem to be positioning themselves for more turmoil, lowering their year-end price target for the S&P 500 on Friday. Bank of America noted that at the end of September, investors were dumping stocks at the fastest rate since the end of 2022, and that won’t change in the coming weeks.
The scariest warning of all came from Jeremy Grantham, who said a 50% crash in the S&P500 would not be a surprise. During the latest episode of Bloomberg's "Merryn Talks Money" podcast, the legendary investor said that the market suffers from attention deficit disorder, “so it always thinks every rally is the beginning of the next great bull market."
With so much overvaluation going on, “the simple arithmetic suggests you'll either have a dismal return forever, or you'll have a nice bear market and then a normal return,” he cautioned. “And the nice bear market will be hopefully less than a 50% decline, but it won't be a huge amount less than 50% from the peak in real terms," Grantham stressed.
That’s what happens when there’s so much pressure on a very complicated financial system. At some point, things start to break. The pattern is very clear – it is always when everybody seems too distracted to pay attention to the signals that a disaster starts to unfold."
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