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Could There Be An October Crash?

Could There Be An October Crash?

September 30, 2021
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“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.” Mark Twain

Well, it was bound to end eventually, but the S&P 500 Index will finish September in the red, ending an incredible seven month win streak. As we noted last month, these long win streaks actually tend to be quite bullish for future returns, with the S&P 500 higher six months later 13 out of 14 times. Yes, stocks were down some in September, but this still bodes well for the near-term.

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Speaking of the near term, here comes October. As Marc Twain explained many years ago, October has long been a source of anxiety for stock investors. “October is known for some spectacular crashes and many expect bad things to happen again this year. 1929, 1987, and 2008 all come to mind when we think about this month,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But the truth is this month is simply misunderstood, as historically it is about an average month.”

As the LPL Chart of the Day shows, since 1950, October ranks as the 7th best month, while the past 10 and 20 years it ranks as the 4th best month. In a post-election year it comes in 5th. So October clearly isn’t one of the best months of the year, but by no means is it the worst either.

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Now, let’s be very clear though, October is known for volatility. No month has seen more 1% moves (up or down) than October, with some of the largest 1-day moves (both up and down) taking place this month. Heck, the S&P 500 hasn’t had a 5% pullback all year (the average year sees about three) and the last one was nearly a full year ago, one of the longest such streaks ever. Not to mention the S&P 500 has now gone an incredible 317 trading days in a row above its 200-day moving average, one of the longest streaks ever. What we are getting at is a 5-7% pullback could potentially come at any time given we haven’t had one in so long.

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Here are some other interesting statistics to think about regarding the S&P 500 in October.

  • It has been 21 years (2000) since October didn’t close at least up or down 1%. Several percent moves up or down are quite common for this month in other words.
  • For six years in a row October has alternated between higher and lower. Given 2020 it was in the red, it could be time for a bounce in 2021. (More on this below)
  • The last two times the S&P 500 was up more than 15% year-to-date heading into October, stocks gained each time (2013 and 2019).
  • The author’s birthday is on October 28, one of the historically most bullish days of the year. Coincidence?

It turns out stocks don’t like politics much. The S&P 500 performs much better in odd numbered years than even years. Remember, even numbered years have elections and midterms in November. Some pre-election jitters makes sense to us, which could bode well for 2021.

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Don’t forget the fourth quarter is historically the best for stocks, with the third quarter the worst. Stocks rise 3.8% on average during the fourth quarter, but the past seven times the S&P 500 was up 15% year-to-date heading into the home stretch of the year, the fourth quarter was higher every single time, up a very impressive 5.8%. In other words, should there be any October scares, investors may want to use the weakness as an opportunity to add to core positions.

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IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index and market data from FactSet and MarketWatch. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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