Market Health

October Stock Market Analysis

September ended with a swoon.

The Dow Jones, the Nasdaq and the S&P 500 finished the month with declines. Their first monthly declines since March!

It’s been a fantastic, largely unfettered rally from the lows we saw earlier this year.

Investors are now starting to feel a little anxious. And there are plenty of headlines triggering clammy palms for traders.

So the question du jour is… Is this a “buy the dip” moment, or do we sit on the sidelines, happily nibbling on some pumpkin-spiced treat?

A Month of Scary Moves

October is home to one of my favorite holidays: Halloween.

But it’s not just ghouls and ghosts who fill investors with fright during this spooky month. The markets themselves do too.

This legend is so ingrained that in Mark Twain’s Pudd’nhead Wilson (published in 1894!), the most famous line is about the market.

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.”

Even though this is a sarcastic take on speculation, October still stands out in investors’ minds as especially ominous.

And not without reason.

A half-dozen of the worst declines in market history have unfolded in the bewitching month.

It’s experienced two Black Mondays, one in 1929 and the other in 1987. Investors were also rattled by a Black Tuesday and Black Thursday in past Octobers.

And in October 2008, the S&P 500 lost nearly 17% as the global financial system melted down.

Due to these nightmarish memories, investors eye October with suspicion.

They keep a watchful eye out for the “October Effect.” Or in more literary-minded circles, the “Mark Twain Effect.”

Both state October is a “peculiarly” bad month for stocks.

But is this anxiety over October really anything to worry about?

Since 1998, the Dow Jones Industrial Average has been down at the end of October just six times.
The Dow Jones Spooky OctoberThe worst was in October 2008 with a drop of 14%. The second-worst was a dip of 5.57% in 2018. Only two other losses were more than 1%.

During the other 16 years, the Dow has been up at the end of the month.

That’s a move higher 73% of the time.

The trend is different from what investors tend to think.

Traditionally, October is the start of a sweet three-month period for the Dow, fueled by consumer spending.

Since 1993, the Dow has averaged more than a 1.6% gain in October and November. The single month better is April.

Now, there is a very important consideration in this data: U.S. presidential elections!

The Election Debate

Of the last six times October has ended lower, four were in election years.

And the Dow’s performance in these periods of uncertainty does have a fairly unenthusiastic trend…

  • 1992: Dow ended October down 1.39%.
  • 1996: Dow ended October up 2.57%.
  • 2000: Dow ended October up 2.93%.
  • 2004: Dow ended October down 0.54%.
  • 2008: Dow ended October down 14.03%.
  • 2012: Dow ended October down 2.54%.
  • 2016: Dow ended October down 0.75%.

So looking at the lead-up to the last seven U.S. presidential elections, we see large caps on the Dow have exited October in the red five times (including in each of the last four election years).

Now, that’s not a clear-cut signal to run for the hills. This is information we can use to our advantage. Knowledge is power, and knowing is half the battle.

If this year’s market follows this trend, then we know there is typically a bounce after the uncertainty clears.

For example…

  • 1992: After ending October lower, the Dow gained 2.45% in November.
  • 1996: After gaining in October, the Dow gained 8.21% in November.
  • 2000: After gaining in October, the Dow lost 5.03% in November but then bounced 3.56% higher in December.
  • 2004: After ending October lower, the Dow gained more than 3% in both November and December.
  • 2008: After ending October lower, the Dow continued falling until March 2009.
  • 2012: After ending October lower, the Dow split the next two months.
  • 2016: After ending October lower, the Dow gained more than 5% in November and another 3% in December.

This is a unique year. We’ve had the pandemic, an economic downturn and a hotly contested presidential race where it seems neither side is going to accept the election results.

With that being said, the worst-case scenario I would envision would be more like 2000 than 2008.

So investors shouldn’t fear October. I know this year is different from any other we’ve seen in decades… maybe ever. But the reality is, Pudd’nhead is right… Every month can be dangerous to speculate on stocks.

The data doesn’t show that October is more peculiarly dangerous than any other month. We just have to be mindful of the market’s tendency to move lower in election years. And whether or not we do see a pullback, the data overwhelmingly shows that those dips are opportunities – not the beginning of the end.

Here’s to high returns,

Matthew