February 24, 2024

While September lived up to its reputation as a brutal month for stocks, October tends to be a “bear-market killer,” associated with historically strong returns, especially in midterm election years, analysts said.
October, however, is also associated with historic market plunges. And skeptics are warning investors that negative economic fundamentals could overwhelm seasonal trends as what’s traditionally the roughest period for equities comes to an end.
U.S. stocks finished sharply higher on Monday to kick off October and the fourth quarter in an attempt to rebound from September lows. The S&P 500 SPX, +2.59% and the Dow Jones Industrial Average DJIA, +2.66% each gained around 2.6% at the close, while the Nasdaq Composite COMP, +5.17% advanced 2.3%.
Stocks on Friday posted their worst skid in the first nine months of any year in two decades. The S&P 500 recorded a monthly loss of 9.3%, its worst September performance since 2002. The Dow fell 8.8%, while the Nasdaq pushed its total monthly loss to 10.5%, according to Dow Jones Market Data. 
Read: Stocks and bonds are ‘discounting for a disaster’ after the worst stretch for investors in 20 years
October’s track record may offer some comfort as it has been a turnaround month, or a “bear killer,” according to the data from Stock Trader’s Almanac. 
“Twelve post-WWII bear markets have 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 bottoms.”
Of course 2022 is also a midterm election year, with congressional elections coming up on Nov. 8.
See: It’s the worst September for stocks since 2008. What that means for October.
According to Hirsch, Octobers in the midterm election years are “downright stellar” and usually where the “sweet spot” of the four-year presidential election cycle begins (see chart below).
“The fourth quarter of the midterm years combines with the first and second quarters of the pre-election years for the best three consecutive quarter span for the market, averaging 19.3% for the DJIA and 20.0% for the S&P 500 (since 1949), and an amazing 29.3% for NASDAQ (since 1971),” wrote Hirsch. 
Skeptics aren’t convinced the pattern will hold true this October. Ralph Bassett, head of investments at Abrdn, an asset-management firm based in Scotland, said these dynamics could only play out in “more normalized years.” 
“This is just such an atypical period for so many reasons,” Bassett told MarketWatch in a phone interview on Thursday. “A lot of mutual funds have their fiscal year-end in October, so there tends to be a lot of buying and selling to manage tax losses. That’s kind of something that we’re going through and you have to be very sensitive to how you manage all of that.”
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. Stock Trader’s Almanac, which is credited with coining the saying, found investing in stocks from November to April and switching into fixed income the other six months would have “produced reliable returns with reduced risk since 1950.”
Strategists at Stifel, a wealth-management and investment banking firm, contend the S&P 500, which has fallen more than 23% from its Jan. 3 record finish, is in a bottoming process. They see positive catalysts between the fourth quarter of 2022 and the start of 2023 as Fed policy plus S&P 500 negative seasonality are headwinds that should subside by then.
“Monetary policy works with a six-month lag, and between the [Nov. 2] and [Dec. 14] final two Fed meetings of 2022, we do see subtle movement toward a data-dependent Fed pause which would bullishly allow investors to focus on (improving) inflation data rather than policy,” wrote strategists led by Barry Bannister, chief equity strategist, in a recent note. “This could reinforce positive market seasonality, which is historically strong for the S&P 500 from November to April.” 
Seasonal trends, however, aren’t written in stone. Dow Jones Market Data found the S&P 500 recorded positive returns between May and October in the past six years (see chart below).
According to Sam Stovall at CFRA Research, though the positive track record offers encouragement, bear markets have had a tendency to alter history. 
“Of the 14 bear market years since 1946 in which a bottom had not been set by the end of September, the S&P 500 was off 0.3% in October and down 1.9% in Q4, while posting only a 50% frequency of advance for both periods,” wrote Stovall in a Monday note.
Stovall added that this performance might be “optimistically deceiving” as five of these bear markets ended in October. Excluding those years with an October bottom, the S&P 500 posted an average decline of 2.5% in October and 5.4% in the fourth quarter, rising in price only 21% and 29% of the time, respectively, said Stovall.
Anthony Saglimbene, chief markets strategist at Ameriprise Financial, said there are periods in history where October could evoke fear on Wall Street as some large historical market crashes, including those in 1987 and 1929, occurred during the month. The S&P 500 plunged nearly 17% in October 2008 after the implosion of Lehman Brothers, following a 9.1% fall in September.
“I think that any years where you’ve had a very difficult year for stocks, seasonality should discount it, because there are some other macro forces [that are] pushing on stocks, and you need to see more clarity on those macro forces that are pushing stocks down,” Saglimbene told MarketWatch on Friday. “Frankly, I don’t think we’re going to see a lot of visibility at least over the next few months.”

When the two-year Treasury yield breaks below its 11-week moving average, yields will have made a top. A lot of the downside pressure on stocks will then lift, and the stock market should rally.

Isabel Wang is a Markets Reporter for MarketWatch.
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