October Crashes The Stock Market Or Kills Bear Markets? Raoul Pal Weighs In; Odds Of 'Low' Coming In Next Week Or 2 'Decently High'

The stock market has thus far had a brutal year and October may not necessarily bring the relief traders are hoping for, economist Raoul Pal said over the weekend.

What Happened: Pal said, “October is the month stock market crashes — It is also the month that kills bear markets.” He delved into the previous October crashes and the events following those.

The Oct. 18, 1987 crash is the one that is stark in the minds of market participants, Pal said, adding that Paul Tudor Jones nailed it by overlaying the 1929 crash. A 50% rally followed the 1929 crash and a depression set in subsequently until 1932, Pal noted.

Most people remember 1987 as the most famous crash of all. October 18th 1987 is forever etched into all our minds... It was also a generational low. pic.twitter.com/HsEQzFcDIg

— Raoul Pal (@RaoulGMI) October 16, 2022

See Also: Dow Dips 375 Points; S&P 500 Down Over 2%

Pal also mentioned the 2008 October crash, which ended in November, but the generational low came in March 2009. Something similar to what is seen currently happened in 1974 and it marked a generational low, he added. The 1997 October crash was precipitated by the Asian crisis that resulted in a generational low, Pal noted, adding that, more importantly, the Fed was forced to pivot.

October Scares: “October is always a scary month for markets,” Pal said, adding it would be particularly true if the economy is in the midst of a recession.

“The typical fall into an October crash is playing out this time too,” he said.

He also delved into the ongoing bear market.

Every bear market is different. This one has been the largest destruction of wealth in history in dollar terms and the second largest in GDP terms (2008 was worse). pic.twitter.com/mx2FLre64o

— Raoul Pal (@RaoulGMI) October 16, 2022

And more importantly, it has come at the worst possible time for the average “Baby Boomer, as it has caused the decimation of pension assets, the economists said. Pensions funds tend to be 60 percent stocks and 40 percent, bonds and higher rates cannot offset it, he said. This, according to Pal, has caused extreme sentiment — the kind associated with generational lows.

Fed’s Choices: Given 76 million boomers are without support and most U.S. politicians are boomers, the Fed will be under pressure to halt, Pal said. Outlining the three choices before the Fed, he said:

• The central bank can reverse quantitative tightening and rate hikes.
• Stop QT and hikes very soon and go to data dependency.
• Keep going with the tightening.

Pal said the first option is unlikely to happen until growth utterly implodes. The second option of stalling is the easiest one and the most likely path this year, he said. Resorting to the third option will force the politicians to fiscally stimulate as unemployment rises or if real wages remain negative.

Bottom Could Come Soon: "Oodds of a low coming in the next week or two are decently high," Pal said.

“The SPX weekly DeMark hits next week, near the bottom of the channel and the 50% retracement, with RECORD bearish sentiment,” he added.

In my mind, the odds of a low coming in the next week or two are decently high. The SPX weekly DeMark hits next week, near the bottom of the channel and the 50% retracement, with RECORD bearish sentiment. pic.twitter.com/NO7zmm7Uxi

— Raoul Pal (@RaoulGMI) October 16, 2022

Benzinga’s Take: Earnings could be the key catalysts that could drive near-term market sentiment. Traders would be hoping for better-than-feared earnings and if their hopes materialize, the market could see a relief rally.

The next major economic data is the advance third-quarter GDP estimate due on Oct. 27. The economy contracted in the first two quarters of 2022 and traders will likely be keen on knowing how conditions have panned out since then.

The Fed will meet two more times this year, once just ahead of U.S. midterms and the second time in mid-December. With the Fed rhetoric seen thus far, a pause looks most likely out of question this year, although a reduced pace of rate hikes can not be ruled out.

Price Action: The SPDR S&P 500 ETF Trust SPY closed Friday's session at $357.63, down 2.28%, according to Benzinga Pro data.

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