“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” — Mark Twain

This witticism from America’s greatest humorist exaggerates stock market risk, due to his bitterness from losing a fortune in bad investments. But October is indeed turning out to be one of the peculiarly dangerous months for investors.

The Israel/Hamas war that started on October 7 qualifies as a “black swan.” By definition, a black swan is a disruptive shock that no one anticipated. The escalating violence in the Middle East has knocked markets back on their heels.

That said, if your portfolio is properly diversified among growth and defensive assets, you’ve precluded damage.

Despite the energy sector outperforming due to surging oil prices, defensive sectors such as consumer staples, utilities, and health care have taken the lead in recent weeks. Meanwhile, cyclical market segments, including small-cap stocks, are facing downward pressure. Gold, the traditional hedge against crises, has been soaring in price.

Our flagship publication, Personal Finance, recommends the following portfolio allocations under current investment conditions: 40% stocks, 30% bonds, 15% hedges, and 15% cash. These are general recommendations and should be tweaked according to your stage of life and tolerance for risk.

Ten-year Treasury yields are rising, hovering near the worrisome 5.0% mark, primarily due to the Federal Reserve’s commitment to maintaining higher policy rates and the anticipation of increased Treasury bond supply to address the growing federal budget deficit. The following chart shows the yield’s sharp ascent:

Global equities also are experiencing a downturn, while oil prices are benefiting from supply uncertainties due to the mayhem in Gaza.

In addition to rising tensions in the Middle East, the latest economic woes of China are weighing on markets. The defaults of the country’s huge property developers Evergrande Group (OTC: EGRNQ) and Country Garden (OTC: CTYRF) have raised fears of global financial contagion.

China’s rise to economic and military prominence over the past half century has been impressive, but now the country’s problems are very real, with rising unemployment and slumping gross domestic product.

China’s predicament underscores how talk about the yuan replacing the U.S. dollar is nonsense. The value of the greenback has risen sharply in the second half of 2023, underpinned by rising yields. Conspiracists enjoy throwing around the term “de-dollarization,” but real-world events belie their alarmism about America.

WATCH THIS VIDEO: Navigating Treacherous Financial Waters

China’s housing sector is troubled, but the housing picture is brighter (albeit mixed) in the U.S.

The latest U.S. housing data, released Wednesday by the U.S. Census Bureau, posits a good news/bad news scenario. Housing starts increased by 7% in September compared to the previous month, a decent pace but slightly below consensus expectations of over 8%.

On the flip side, building permits saw a more than 4% decline, although they surpassed expectations. Overall, this batch of data suggests that the housing market is performing a balancing act.

Low unemployment and strong consumer spending have propelled construction activity and housing starts.

Simultaneously, 30-year mortgage rates have reached 8%, their highest level since 2000, exerting downward pressure on housing investment. This aligns with the latest mortgage applications, down 21% this week compared to the same week last year, and the drop in building permits indicating a slowdown in forthcoming projects.

The Magnificent Seven…

Third-quarter earnings season kicked off positively last Friday, with major banks surpassing consensus expectations. The focus has shifted to the technology sector, with earnings for tech stalwarts rolling in this week.

A primary driver of tech sector growth has been a coterie of seven mega-cap stocks: Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Meta Platforms (NSDQ: META), Microsoft (NSDQ: MSFT), Nvidia (NSDQ: NVDA), and Tesla (NSDQ: TSLA).

In aggregate, Q3 earnings for these seven market-moving behemoths are expected to grow by 34.9% from the same period last year. The mania over artificial intelligence (AI) has subsided somewhat, but AI remains a powerful multi-year tailwind for the tech sector and overall stock market.

S&P 500 earnings as a whole seem to be holding strong for the Q3 season, despite interest rate challenges and persistently high labor costs. Analysts anticipate that earnings growth will accelerate in Q4 and into 2024.

That said, Tesla shares plunged 9.30% Thursday, after the electric vehicle (EV) maker’s Q3 operating results missed expectations on both the top and bottom lines.

Tesla’s dismal earnings performance, exacerbated by CEO Elon Musk’s pessimistic outlook on the earnings call for EV demand, calls into question sanguine consensus projections for the tech sector’s earnings this season.

Nvidia shares also have been under pressure, after the White House on Tuesday imposed new restrictions on AI chips that threaten the company’s substantial business with China.

As Q3 earnings season continues, the tech sector’s moment of truth is at hand. Rising yields are an increasing threat to stocks, especially those that are growth oriented.

The main U.S. stock market indices closed sharply lower Thursday, as follows:

• DJIA: -0.75%
• S&P 500: -0.85%
• NASDAQ: -0.96%
• Russell 2000: -1.51%

The CBOE Volatility Index (VIX) jumped past 21, which signals a prolonged period ahead of investor stress and market choppiness. The 10-year yield rose to 4.99%, another bearish sign.

Investors grew skittish after Fed Chair Jerome Powell, in a speech Thursday, made remarks interpreted as hawkish. Notably, Powell said:

“My colleagues and I are committed to achieving a stance of policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.”

When Powell speaks, markets shudder.

A recessionary signal is coming from the key commodity of copper. Prices for the “red metal” have fallen 12% over the past six months, an indication of economic pessimism. Maybe Twain wasn’t kidding about October.

Fifty years of wealth-building…

As I’ve just explained, the financial markets are getting dangerous. But you can stay in the game, as long as you’re selective.

For market-thumping gains with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, has been helping investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

John Persinos is the editorial director of Investing Daily.

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