It's apt that October - a month associated with Halloween and all things horror - is an among the scariest months for the stock market. As we get into the depths of autumn and the weather gets gloomier, so does sentiment on Wall Street.
The idea of stocks with more than their fair share of ups and downs in October is well-known to experienced investors. Since World War II, the S&P 500's average volatility in October has been 35% higher than the average for the remaining 11 months of the year, said Sam Stovall, CFRA's chief investment strategist.
The stock market is often labeled as volatility - the ability for something to change quickly and unpredictably. It can make investors feel uneasy, but the reality is that volatility is not an inherently bad thing, hard as it may be to stomach in the moment.
Investors expect stocks to nosedive during the month of October, a phenomenon known as the October effect. s returns in October, likely because of the crashes of 1929 and 1987, Stovall says.
Many portfolios were reduced to ashes at those events. The 1987 crash resulted in the S&P 500 dipping by 21.8%, the largest single-month decline since 1945. Many American investors have been dreadful about the month of October, which has caused many to lose faith in the stock market.
It's a fascinating rarity. In reality, stocks perform better in October than many investors think.
In this timeframe, Sandven said, the average S&P 500 return in October is 1.4%, higher than the average return of all but three other months. This evidences that volatility isn't always a bad thing. On the one hand, October has seen two of the worst months of stock market performance in U.S. history in 1929 and 1987, while on the other hand, as Sandven's numbers show, the month experiences a lot of volatility, delivering unpredictable gains for stockholders, too.
Ross Mayfield, investment strategy analyst at Baird, tells Money that in fact, than October tends to be.
CFRA Research data show that since 1945, the month of September brings in an average of 0.74%, compared to October's 1.4% gain.
However, nobody knows how stocks will perform during any given month without a crystal ball in the future. In August and September, stock performance can be used to forecast the next months to come.
In 2023, the 8th and ninth months show promising signs of what could happen in October.
All said, don't get nervous just because October is descending on us. In June, stocks have shown signs of strength, entering a new bull market.
While recent news of recessions and more Federal Reserve interest rate hikes may sound glum, there is no prospect of a recession in 2023. Stovall, however, notes that the period between the Fed's last rate hike and the first rate cut could be profitable. The S&P 500 has surged by an average of 13% during these pause periods between the last hike and first cut since 1990.
Timing the market is never a sound strategy. A diversified portfolio of stocks, bonds, and mutual funds should be prioritized to suit any long-term goals you have in mind.
Volatility shouldn't be a concern when looking at October's history of gains, and if you're investing for the long term, volatility will iron itself out over time anyway.
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