Looking back through history, October is the month most prone for witnessing brutal stock market crashes. After all, the three worst single-day falls ever recorded all took place during this month. Two of these occurred on successive days in 1929. The other, in 1987.
Despite being crash-prone, October won’t put me off from investing. However, I’m favouring certain sectors over others at the moment.
The magnificent seven
Virtually all the gains seen this year in the S&P 500 have been confined to just seven stocks. Investors think the likes of Alphabet, Microsoft and Nvidia will be the biggest beneficiaries of the artificial intelligence (AI) revolution.
Maybe they will. But what concerns me is the timeframe over which AI technological advances will play out. With these stocks priced for perfection, if investors don’t start to see some tangible results soon, they could dump such stocks.
After the beating tech stocks took in 2022, not even the experts on Wall Street predicted the size of the rally this year. Their resilience in the face of a tough economic environment has changed analysts’ and investors’ views. At the beginning of 2023, a recession seemed unavoidable. Today, that seems less likely and stock prices reflect this.
Disinflationary decade?
Investors are approaching this market from one main viewpoint: that this decade (like the previous) will be disinflationary. I don’t hold that view.
Growth stocks thrived in the 2010s because debt was cheap, and bonds yielded virtually nothing. I can provide at least two reasons why neither will be the case this decade.
Covid, rising geopolitical tensions, and war in Europe have led to the breakdown of just-in-time supply chain models. As a consequence, an increasing number of companies are onshoring their manufacturing capabilities. An acceleration of deglobalisation will be inflationary.
As consumers become squeezed through a cost-of-living crisis, so they’re beginning to demand higher wages. This translates into lower corporate profits. It also has the potential of unleashing a wage-price spiral, similar to what happened in the 1970s.
Growth to value transition
In 2022, value stocks outperformed growth stocks. This year, the opposite has been the case. I view this reversal as somewhat temporary. In light of this, I’ve been positioning my portfolio to take advantage of this transition.
After coming off its highs in 2022, oil is now starting to move higher again. Yes, this short-term price action is being driven by OPECs decision to cut oil production. But this point is masking the bigger issue concerning supply-side constraints.
Despite being near all-time highs both BP and Shell shares are cheap, particularly relative to their US peers. That is why I topped up on both in my ISA portfolio only last month.
Another sector I’ve been buying into heavily over the past six months is mining and basic materials. In the world’s push for net zero, we’ve forgotten that it will be but a pipe dream without metals.
Underinvestment in exploration is in my view setting the scene for an explosion in the price of metals such as copper and nickel. My two favoured picks here are Glencore and Anglo American. Both trade at rock-bottom valuations and are well positioned to take full advantage of a demand spike in the coming years.
