We are coming up on a seasonal turning point in the stock market.
October is special for three reasons:
1. It is the month when history’s most spectacular market crashes have occurred, most famously in 1929 and 1987.
2. Yet it is actually, on average, a pretty good month.
3. Based on historical price patterns, stocks are likely to chug ahead in the fourth quarter.
Let’s look at this a little more closely.
Crashes Few people alive today remember the crash of 1929, but we all learned about it in school or from studying market history. The Dow Jones Industrial Average lost 12.8% on Monday, October 28, 1929, and another 11.7% the next day. The Great Depression followed.
Fast forward 58 years to October 19, 1987. The industrial average lost 22.6% in a single day, the worst one-day crash ever. Those were the three worst October crashes, but not the only ones. Seven of the Dow’s ten worst days occurred in October.
October Performance Despite October’s fearsome reputation for being crash-prone, it is usually not a bad month. It has averaged a 0.6% price gain from 1928 through 2022, according to Yardeni Research. Annualize that and you get 7.2%. That’s the same as March or August, and about middle-of-the-back.
The four best months are July (20.5% annualized), April (16.8%), December (15.6%) and January (14.4%).
Three months have averaged negative returns. September is the worst, annualizing to negative 13.2%. February and May average negative 1.2% annualized.
Oh and if you must know, the returns for the remaining months are 9.2% annualized for June, and 10.8% for November.
Bear in mind that these are just averages, or tendencies. They are not even within a stone’s throw of being guarantees.
Fresh Worries Will this October follow the typical pattern and end up with a moderate gain?
Pessimists can point to a number of special factors that could poison the market’s performance this month. (1) The United Auto Workers are striking against General Motors GM , Ford and Stellantis. (2) A government shutdown looks likely. (3) Interest payments on student loans resume in October.
Then, too, interest rates are fairly high, and the Fed thinks it may ratchet them up one more notch this year.
So will this October be poor? No one knows, but I hear my mentor David Dreman’s words ringing in my ear: “Bet on the base case, not the rate case.” By that he meant that the general pattern (the base case) often holds, despite special circumstances (the rate case).
Historical Patterns Ned Davis Research annually produces a “Cycle Composite,” which is an equal-weighted melding of three separate cycles, the one-year cycle, the four-year Presidential Cycle, and the 10-year cycle. This year, the model suggests a fourth-quarter rally, accelerating toward the end of the year.
Also, the firm notes that the vast majority of the stock market’s gains occur in November through April.
A $10,000 investment made in 1950 in the Standard & Poor’s 500 Index would have appreciated only to $14,590 by year-end 2022 if invested only in May through October. But if invested from November through April, it would have appreciated to $928,356.
This seems to bear out the old saw, “Sell in May and go away.” But this seasonality phenomenon has weakened in recent years.
By John Dorfman, Contributor. This Forbes article was legally licensed through AdvisorStream.