While investors took comfort from the rapid recovery of stocks in August and September, troubling developments at home and abroad rattled markets again in early October.

Stocks and bond yields briefly fell on Tuesday after Iran launched a missile attack on Israel, while the International Longshoremen's Association launched a port strike in the United States that could have powerful ripple effects from Maine to Texas.

Adding to the tension is the fact that a divided nation is just five weeks away from electing its next president, an outcome that may not be clear until the Federal Reserve’s next interest rate decision on Nov. 7, if past election results are any guide.

A recent spate of bad news has triggered wild price swings in financial markets. “All of these factors are affecting the market and people’s thinking,” said Allison Walsh, investment product strategist at Income Research + Management.

Amid all the uncertainty, however, investors should not overlook the importance to the markets of Friday's monthly jobs report.

“I’m watching the labor market very closely,” said George Catrambone, head of fixed income and trading for the Americas at DWS Group in New York. “The nonfarm payrolls data on Friday will give us a clear signal.”

Worried

Past strikes have usually been resolved, but at the expense of higher labor costs. Recent geopolitical tensions briefly roiled markets, but stocks quickly resumed their gains to new highs. Despite concerns about U.S. growth, bond spreads remain near historic lows.

“The problem may be that the market has become too complacent about these issues being resolved,” DWS’s Catrambone said, referring to labor strikes, geopolitical risks and other developments that in the past may have taken longer for markets to shake off.

However, traders have been rewarded many times since the global financial crisis by buying on dips, he said: “Similarly, they have not benefited by sitting on the sidelines or going short and not investing at all.”

Walsh of Income Research also noted that her team has been watching the more than $6 trillion in cash-based money market funds for much of this year. “Money market fund yields are still high, but we don’t know how long this will last.”

With the Fed's recent shift toward rate cuts, keeping an eye on employment data seems like a sensible strategy, as it influences the Fed's willingness to cut rates more than any other factor.

“The pace of job growth has been declining over the last few years,” said Alex Coffey, senior trading strategist at Schwab, but “we’re almost seeing a relative freeze in the job market, a little bit like the housing market.”

Facing volatility

With stocks hovering near all-time highs, Coffey said the reasons for future Fed rate cuts will be more important than ever because stocks tend to rise when the economy has a soft landing, but could suffer if rate cuts are intended to rescue the economy.

Jack McIntyre, portfolio manager at Brandywine Global, believes a recession looks further away than it did a month ago. “The world’s two largest economies have both turned to stimulus, which makes a global recession less likely.”

Still, his team has been preparing for either a soft or hard landing for the U.S. economy, focusing on bonds that offer yield. If the 10-year Treasury yield rises to 4.5% from its recent 3.8%, McIntyre said he would “buy it with both hands.”

Schwab's Coffey said stock investors don't have to put all their eggs in one basket. For example, investors with short-term trading strategies can limit downside risk in volatile markets by reducing order sizes.

In the long run, though, staying invested is more important than trying to time the market accurately. "Have a plan, implement a strategy, and stick to the rules."

The article is forwarded from: Jinshi Data