3 Stocks to Sell and 3 Stocks to Buy for October

SPEAKER_1 (0:00)

As a financial advisor, you've got your clients back, and we've got yours. With Vanguard's actively managed bond funds, you're backed by consistent performance with a low cost edge for an advantage that keeps compounding and compounding and compounding and... Sorry, quick break for legal. To learn more, visit vanguard.com/audio.

Dave Sekera (0:18)

All investing is subject to risk. Investments in bonds are subject to interest rate, credit and inflation risk. Vanguard Marketing Corporation distributor.

SPEAKER_1 (0:24)

And compounding and compounding and compounding. Are you backed by institutional quality bond funds?

Dave Sekera (0:29)

Vanguard.

SPEAKER_3 (0:30)

Please stay tuned for important disclosure information at the conclusion of this episode.

Susan Dziubinski (0:53)

Hello, and welcome to The Morning Filter Podcast. I'm Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief US Market Strategist, Dave Sekera, to recap what's been going on in the market, cover what investors should have on their radars for the week, and share some new Morningstar research and a few stock ideas. Now programming note, Dave and I are taping this episode on Friday, October 2nd, before market open. So our comments don't reflect any developments in the market after that time.

Also, I wanted to let viewers know that you'll be seeing a fresh face on the podcast starting next week. Our colleague, Sarah Hanson, will be sitting in for me for the next six weeks while I'm out on sabbatical. Sarah has been a senior markets reporter at Morningstar for a few years. She's also written for Money Magazine and for Forbes. So please welcome her warmly and then I'll be back on the podcast in mid-November.

All right, well, good morning, Dave. Now it's October, so let's take a quick look back at September. And I remember you saying early in September that this September is historically the worst month for stocks. So how did that month end?

Dave Sekera (2:03)

You know, honestly, Susan, considering just how negative all the macrodynamics in the market have been, September held up much better than I otherwise would have necessarily expected. Now, as you mentioned, September on average is usually the worst month of the year. Just have to note, though, October has a history of some of the worst individual sell-offs over time, so I would say not necessarily out of the woods just yet. In fact, I kind of went through some of the history here in the market. So October accounts for eight of 20 largest single day declines. So we'll see if we have got third quarter earning season ramping up. So we'll see if we get some of that volatility this month or not. Now, as far as how did September do, so if you look at the broad market, so I used the Morningstar US Market Index, it was down only six-tenths of a percent. When I break that down into the morning style box, I would note that the value category was down the worst. The market was down 4.9%, core stocks down 3%, and growth almost break even, only down one-tenth of a percent. By capitalization, large cap stocks were up seven-tenths of a percent, mid-caps down 4.7%, and small caps down 1.8%.

And then looking at by sector, only two sectors were in the green this month. That was tech and communications. Those were up a little bit over 4.1% each. And the worst-performing sectors were the basic materials and financials. Those were down over 7% in September. Looking down the rest of the list, consumer cyclicals and real estate both down over 6%. And utilities, of course, being a proxy for fixed income was down 5.7%.

All right.

Susan Dziubinski (3:46)

Well, speaking of fixed income, you and I talked quite a bit in September about Treasury bond yields on the podcast. So how did the bond market end up looking for the month of September?

Dave Sekera (3:57)

Well, and I guess the real question here to me, and maybe it's a little too early for the Halloween reference, but our equity investors whistling past the bond boneyard at this point, and I think that they may be. So we'll see how October shapes up. So if you look at the core bond index, so that's our broadest proxy of the fixed income market, that was down 2.6% in September. And of course, it's all about how much interest rates rose across the entire curve. Looking at the yield curve here, the two-year treasury was up 54 basis points. It hit 4.88%. The five-year was up 60 basis points, hitting 5.09%. And the 10-year closed at 5.29%. So that was a 54 basis point increase just this past month. So I really think as an investor, you need to keep a close eye on the 10-year. For now, it seems like the equity market kind of just doesn't care about interest rates. So I think you just want to watch and see if the 10-year can hold that 5.25%.