What investors need to know about the complicated stock market

What investors need to know about the complicated stock market story in October

While September lived up to its reputation as a brutal stocks month, October tends to be a “bear market killer” coupled with historically strong returns, particularly in election years.

However, October is also associated with historic market falls. And skeptics are warning investors that negative economic fundamentals could overwhelm seasonal trends as what has traditionally been the toughest period for stocks comes to an end.

Gross Stretch

US stocks ended sharply lower on Friday, posting their worst nine-month slide in two decades. The S&P 500 SPX, -1.51%, posted a monthly loss of 9.3%, its worst September performance since 2002. The Dow Jones Industrial Average DJIA, -1.71%, fell 8.8% during The Nasdaq Composite COMP, -1.51% on Friday’s gain pushed monthly total losses to 10.5%, according to Dow Jones Market Data.

Read: Stocks and bonds are “discounted for disaster” after their worst spell for investors in 20 years.

Indices posted modest gains for the first half of the month after investors fully priced in a large rate hike at the FOMC meeting in late September, as August inflation data showed little sign of easing price pressures. However, a more hawkish than expected central bank stance caused equities to give up all those early September gains. The Dow entered its first bear market since March 2020 in the last week of the month, while the benchmark S&P slipped to another low from 2022.

See: It’s the worst September for stocks since 2008. What that means for October.

Bear markets and midterms

October’s track record may offer some comfort, as it was a turnaround month, or “bear killer,” according to Stock Trader’s Almanac data.

“Twelve post-war bear markets ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (S&P 500 down 19.4%),” wrote Jeff Hirsch , publisher of The Stock Trader’s Almanac, in a note Thursday. “Seven of those years were mid-term lows.”

Of course, 2022 is also a mid-election year, with congressional elections coming up on November 8th.

According to Hirsch, October is “a standout” during the mid-election years and is usually where the “sweet spot” of the four-year presidential election cycle begins (see chart below).

“The fourth quarter of the interim years, combined with the first and second quarters of the pre-election years, forms the best range of three consecutive quarters for the market, averaging 19.3% for the DJIA and 20.0% for the S&P 500 (since 1949). and a staggering 29.3% for NASDAQ (since 1971),” wrote Hirsch.

What investors need to know about the complicated stock market


“Atypical Period”

Skeptics are not convinced the pattern will hold true in October. Ralph Bassett, head of investments at Abrdn, a Scotland-based wealth management firm, said this momentum could only unfold in “more normalized years”.

“This is such an atypical time for so many reasons,” Bassett told MarketWatch in a phone interview Thursday. “A lot of mutual funds have their fiscal year in October, so there’s usually a lot of buying and selling to deal with tax losses. It’s something we’re going through right now and you have to be very sensitive about how you handle it all.”

An old Wall Street adage, “sell in May and go away,” refers to the market’s historical underperformance during the six-month period from May to October. The Stock Trader’s Almanac, which is credited with coining this adage, found that investing in stocks from November through April and switching to fixed income for the other six months “would have provided reliable returns with reduced risk since 1950.”

Strategists at Stifel, an asset management firm, are claiming that the S&P 500, which has fallen more than 23% since its record close on Jan. 3, is in the process of bottoming out. They see positive catalysts between the fourth quarter of 2022 and early 2023 as Fed policy and negative seasonality in the S&P 500 are headwinds that should ease by then.

“Monetary policy works with a six-month lag and between [Nov. 2] and [Dec. 14] In the last two Fed meetings of 2022, we are seeing a subtle move toward a data-driven Fed pause that would optimistically allow investors to focus on (improving) inflation data rather than policy,” strategists wrote led by Barry Bannister, Chief Equity Strategist, in a new note. “This could amplify positive market seasonality, which is historically strong for the S&P 500 from November through April.”

October crashes

However, seasonal trends are not set in stone. Dow Jones Market Data found that the S&P 500 posted positive returns between May and October for the past six years (see chart below).

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Anthony Saglimbene, chief markets strategist at Ameriprise Financial, said there are periods in history when October could inspire fear on Wall Street, as several major historic market crashes, including those of 1987 and 1929, happened during the month. The S&P 500 plummeted nearly 17% in October 2008 after the Lehman Brothers implosion, after falling 9.1% in September.

“I think any years where you’ve had a very difficult year for stocks, seasonality should disregard that as there are some other macro forces [that are] are driving stocks and you need to see more clarity on the macro forces that are pushing stocks lower,” Saglimbene told MarketWatch on Friday. “Honestly, I don’t think we’re going to see much visibility at least in the next few months.”