Stock market reversal? Why October is known as a “bear killer”.

US stocks ended sharply lower on Friday, posting their worst slippage in the first 9 months of a year in two decades. The S&P 500 SPX,
-1.51%
posted monthly losses of 9.3%, the worst September performance since 2002. The Dow Jones Industrial Average DJIA,
-1.71%
fell 8.8%, while the Nasdaq Composite COMP,
-1.51%
pushed its total monthly loss to 10.5%, according to Dow Jones Market Data.

Indices had posted modest gains in the first half of the month after investors fully priced in a sharp rise in interest rates at the FOMC meeting in late September, with August inflation data showing little signs of slowing price gains. However, the central bank’s more hawkish than expected stance on its monetary policy caused stocks to give up all those early gains. The Dow entered its first bear market since March 2020 during the last week of the month, while the large-cap index slid to another 2022 low.

See: This is the worst September for stocks since 2008. What this means for October.

October’s balance sheet may offer some comfort as it is a reversal month, or a “bear killer,” according to data from Stock Trader’s Almanac.

“Twelve post-WWII bear markets ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011 (S&P 500 down 19.4%) “, wrote Jeff Hirsch, editor of the Stock Trader’s Almanac, in a note Thursday. “Seven of those years were mid-term lows.” 2022 is also a midterm election year, with congressional elections in November.

According to Hirsch, Octobers in midterm election years are “downright stellar” and are usually when the “sweet spot” of the four-year presidential election cycle begins (see chart below). below).

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

Skeptics aren’t convinced the pattern will hold in October. Ralph Bassett, chief investment officer at abrdn, an asset management firm, said that dynamic could only happen in “more normalized years”.

“It’s such an atypical time for so many reasons,” Bassett told MarketWatch in a phone interview Thursday. “Many mutual funds have their fiscal year in October, so there’s usually a lot of buying and selling to manage tax losses. That’s the kind of thing we go through and you have to be very sensitive to how you handle it all.

Seasonality trends for October

The old Wall Street adage, “sell in May and walk away,” refers to the market’s historical underperformance over the six-month period from May to October. Stock Trader’s Almanac, which is credited with coining the saying, found that investing in stocks from November to April and switching to fixed income the other six months would have “produced reliable returns with reduced risk since 1950. “.

Strategists at Stifel, a wealth management firm, say the S&P 500, which has fallen more than 23% since its January 3 high, is in the process of bottoming out. They see positive catalysts between the fourth quarter of 2022 and early 2023, as Fed policy and negative seasonality in the S&P 500 are headwinds that should ease by then.

“Monetary policy is operating with a six-month lag, and between the last two Fed meetings of 2022 from Nov. 2 to Dec. 14, we are seeing a subtle move toward a data-driven Fed pause that would allow investors to focus on (improving) inflation data rather than policy,” strategists led by chief equity strategist Barry Bannister wrote in a recent note. “This could reinforce positive seasonality in the market, which is historically strong for the S&P 500 from November through April.”

Seasonal trends, however, are not set in stone. Dow Jones Market Data revealed that the S&P 500 has posted positive returns between May and October for the past six years (see chart below).

Anthony Saglimbene, chief market strategist at Ameriprise Financial, said there were times in history when October could bring fear to Wall Street, as some major historic stock market crashes, including 1987 and 1929, occurred. during the month.

“I think any years you’ve had a really tough year for equities, seasonality should ignore that because there are other macro forces that are pushing equities 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 in the next few months.”