Will October Be a Scary Month for Stocks?
You can feel the panic start to creep in…
Since September 15, the Invesco QQQ ETF (QQQ) has shed more than 5.5%.
The S&P 500 slipped 5%.
And most of the damage has occurred since September 20…
But that’s precisely the kind of swoon we told investors to prepare for. Even down to the day.
For reference, this marks the sixth decline in September for “the Qs” in the last seven years. Not to mention the fourth consecutive year where the Nasdaq tumbled 6% or more in the month.
This is why I began recommending in August to tighten stops and be patient. Pain was coming.
Now the question from clammy-palmed investors is: What’s next?
Are there more storm clouds on the horizon or some glorious autumn, sunny days?
Well, let’s find out…
Forget the September Scare
October is home to one of my favorite holidays: Halloween.
But it’s not just ghouls and ghosts that fill investors with fright during this spooky month. The markets do too.
This legend is so ingrained that even in Mark Twain’s Pudd’nhead Wilson, the most famous line is about investing.
David “Pudd’nhead” Wilson warns, “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.”
For centuries, October has stood out as an ominous month for investors.
And not without reason.
A half dozen of the worst declines in market history have unfolded in the bewitching month.
Investors have suffered through two “Black Mondays” in October, one in 1929, the other in 1987. They’ve been rattled by “Black Tuesdays” and “Black Thursdays” in the month.
And how can we forget the fright of the infamous October 2008? That’s the month the S&P 500 lost 17% of its value as the global financial system melted down.
Due to these nightmarish memories, its understandable investors tend to eye October with suspicion. They keep a watchful eye out for “The October Effect,” or what’s known in more literary-minded circles, “The Mark Twain Effect” (ignoring the joke that all months are dangerous months to speculate). They tiptoe gingerly deeper into fall, oftentimes just surviving the horror show that is September.
But the reality is, October has earned more of a bad rap than it deserves…
A Great Month with Bad PR
Over the last 20 years – which spans the release of four installments of the Halloween movie franchise – the Nasdaq has weathered October fairly well.
In fact, during that stretch, the Nasdaq 100 proxy has only ended the month lower seven times...
That’s a 65% success rate.
That may not sound like a sure thing. And it isn’t. But it does represent a tremendously strong opportunity for gains. Especially when you understand the nuances of the trend.
For instance, the only months with better success rates for the Qs than October are July and November.
But there’s a particularly important element to understand about volatility and October…
The worst unfolds in election years.
Look at the chart above.
Only three of the losses in the month over the last two decades weren’t U.S. presidential election years – 2005, 2009 and 2018.
And the largest of those declines, 2018, was part of the U.S. trade war with China that escalated to the worst Christmas Eve session on record.
The rest of the QQQ’s stumbles in October were investor jitters leading up to election day. And this is a trend not only seen in tech stocks, but also on the Dow Jones Industrial Average and the S&P.
So, you’ll hear that October’s volatility is “frightful” and “legendary.”
But most of the time, it’s due to unease over the upcoming ballot box battle and who’s going to be living in the White House, as well as what party is going to control Congress. Throw in some global economic uncertainty, like we had in 2008, and the market collapse can be historic.
So, if this were an election year, I’d tell investors to be afraid heading into October.
But even though the debates are underway, there’s still more than a year before the next Election Day.
A Sweet Month for Returns
Historically, October is the best month of the year for tech...
That’s because we’re heading into the all-important holiday shopping season. That provides a boost for stocks.
The swoons in September are triggered by sweating palms over third quarter earnings. Marco headlines come into focus. The Federal Reserve’s September rate decision takes main stage. But by the time October gets underway and third quarter earnings season begins, that anxiety starts to fade.
In turn, we end up being rewarded with a great multi-month stretch of gains.
So, investors shouldn’t fear October. The reality is, Pudd’nhead is right – every month can be dangerous to speculate on stocks. But the data shows October isn’t any more “peculiarly” dangerous than any other… in fact, quite the opposite.
Don’t be spooked by September’s scare. Instead, prepare for a rally from here.
Looking to scare up some gains this October,
Matthew
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How to Prepare for the Death of the Bull in 2024
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Great comments as usual and we’re missing having you on the O.C.