What investors should know about October’s complicated stock-market history

While September lived up to its reputation as a brutal month for stocks, October is known as a “bear-market killer,” with historically strong returns, particularly during midterm election years.

However, October is also associated with historic market drops. Skeptics warn investors that negative economic fundamentals could overwhelm seasonal trends as the worst period for equities comes to an end.

A difficult stretch

The S&P 500 finished sharply lower on Friday, marking the worst drop in the first nine months of any year in two decades. The S&P 500 SPX, -1.51% lost 9.3% in September, its worst September performance since 2002. According to Dow Jones Market Data, the Dow Jones Industrial Average DJIA, -1.71% fell 8.8% on Friday, while the Nasdaq Composite COMP, -1.51% increased its monthly loss to 10.5%.

The indexes had gained modestly in the first half of the month, as investors fully priced in a large interest-rate hike at the FOMC meeting in late September, despite August’s inflation data showing no signs of easing price pressures. However, the Fed’s more hawkish-than-expected stance caused stocks to lose all of their early September gains. In the final week of the month, the Dow entered its first bear market since March 2020, while the S&P 500 fell to a new 2022 low.

Bear markets and midterms

According to Stock Trader’s Almanac data, October has been a turnaround month, or a “bear killer.”

“Twelve post-WWII bear markets ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011 (S&P 500 declined 19.4%),” wrote Jeff Hirsch, editor of the Stock Trader’s Almanac, in a note on Thursday. “Seven of these years were midterm lows.”

Of course, 2022 is also a midterm election year, with congressional elections on November 8th.

According to Hirsch, Octobers in midterm election years are “downright stellar,” and this is usually where the “sweet spot” of the four-year presidential election cycle begins.

“The fourth quarter of midterm years combines with the first and second quarters of pre-election years for the best three consecutive quarter span for the market, averaging 19.3% for the DJIA, 20.0% for the S&P 500 (since 1949), and an incredible 29.3% for NASDAQ (since 1971),” Hirsch wrote.

Atypical period

Skeptics are sceptical that the pattern will continue in October. According to Ralph Bassett, head of investments at Abrdn, a Scottish asset management firm, these dynamics can only be seen in “more normalised years.”

“This is just such an atypical period for so many reasons,” Bassett said in a phone interview with MarketWatch on Thursday. “Because many mutual funds end their fiscal year in October, there is a lot of buying and selling to manage tax losses.” That’s something we’re going through, and you have to be very careful about how you handle everything.”

“Sell in May and go away,” as the old Wall Street adage goes, refers to the market’s historical underperformance from May to October. According to the Stock Trader’s Almanac, which is credited with coining the phrase, investing in stocks from November to April and switching to fixed income for the remaining six months would have “produced reliable returns with reduced risk since 1950.”

Stifel, a wealth management firm, believes the S&P 500, which has fallen more than 23% since its record finish on January 3, is nearing the bottom. They see positive catalysts between the fourth quarter of 2022 and the beginning of 2023, as Fed policy and negative seasonality in the S&P 500 are headwinds that should fade by then.

October crashes

Seasonal trends, on the other hand, are not set in stone. Dow Jones Market Data discovered that the S&P 500 has had positive returns between May and October for the past six years.
According to Anthony Saglimbene, chief markets strategist at Ameriprise Financial, there have been times in history when October has caused fear on Wall Street, including major market crashes in 1987 and 1929. Following a 9.1% drop in September, the S&P 500 fell nearly 17% in October 2008, following the implosion of Lehman Brothers.

“I think that any year where you’ve had a very difficult year for stocks, seasonality should discount it, because there are some other macro forces pushing on stocks, and you need to see more clarity on those macro forces pushing stocks down,” Saglimbene told MarketWatch on Friday. “To be honest, I don’t think we’ll see much visibility in the next few months.”