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Why stocks may just roll into an October correction

Don't feel at ease because today is the final trading day in an ugly September for markets.

On the contrary, put yourself on heightened alert — an easy case could be made that October may be equally as glum for stocks.

But first those grim facts.

The S&P 500 (^GSPC) is down by 5% in September, the Nasdaq Composite (^IXIC) has shed 6.5%, and the Dow Jones Industrial Average (^DJI) is off by a more pedestrian 3.4%.

Investors have fretted about everything from the looming government shutdown (that would begin this weekend) to fears of one more interest rate hike this year, which Chicago Fed President Austan Goolsbee teed up to Yahoo Finance this week, as well as rates staying high deep into 2024. Oil prices climbing toward $100 a barrel has also weighed on the minds of the bulls.

Read more: How a government shutdown would impact your money: Student loans, Social Security, investments, and more

The sour mood has hurt the likes of big-cap tech names such as Netflix (NFLX), with shares off by 15% in the past three weeks (down 13% in the month). Apple (AAPL) has lost 9.8% in the face of positive reads on new iPhone demand. Even Salesforce (CRM) has pulled back by 8% despite the unveiling of cool new AI tools at the company's Dreamforce conference.

Bottom line: Sentiment isn't good!

"I think it's all coming home to roost as investors realize that the Fed does not have this under control and that the economy is struggling," Kace Capital Advisors managing partner Kenny Polcari told Yahoo Finance.

Polcari makes a good point that there is a lot of "stuff" coming home to roost. Just take a look at some of the things we have seen this week in markets:

  • Target is closing nine stores, citing rising retail crime. Certainly, there is an economic message or two there.

  • Costco said on its earnings call that it’s not seeing a "dramatic" pick-up in thefts (hard to thieve and carry out a 25-pack of paper towels from Costco), which means they are seeing some form of theft pick-up.

  • Consumer confidence hit a four-month low.

  • New data on housing showed home purchases fell.

  • H&M warned about a sales plunge in September, blaming warm weather in Europe for delaying purchases of winter clothes. But hey, my H&M store at Roosevelt Field in New York has been a little empty on the weekend too.

  • BofA warned this week about rising credit delinquencies hitting retailers, with specific concerns cited for Kohl's and Nordstrom.

  • Used car retailer CarMax had a dreadful quarter, with execs blaming rising interest rates for consumers delaying auto purchases. The company also saw a year-over-year pickup in credit losses.

That’s a ton of signals that point to growing economic stress that the market likely hasn't adjusted for yet.

Are we witnessing the lagged effects of Fed policy? Probably. Are households really feeling that inflation is slowing? Probably not. If people aren’t buying homes or used cars because of higher interest rates, is that a problem for stocks? Yes, it should be.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

A brown bear inspects a pumpkin in its enclosure.
A brown bear inspects a pumpkin in its enclosure at Pairi Daiza animal park in Brugelette on Oct. 30, 2020. (KENZO TRIBOUILLARD/AFP via Getty Images) (KENZO TRIBOUILLARD via Getty Images)

Even Tak Niinami, CEO of Suntory, the third-largest liquor producer, told me this week that US consumers are trading down to cheaper whiskey.

Take this all together, and nothing hints that sentiment in markets stands to improve in October — at least not in the early part of the month ahead of big bank earnings, which stand to capture the aforementioned consumer weakness.

"Our work suggests this correction in time and price has further to go, but at this point, we are still viewing this in the context of a choppy trading range," Truist chief investment officer Keith Lerner told me.

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.

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