Get ready for the stock market’s October surprise

Posted by jbrumley on September 26, 2017 1:57 PM

- Investors can expect a bumpier ride down Wall Street -

By Mark Hulbert, MarketWatch

Fasten your seatbelts. October is just around the corner, and historically it’s the most volatile month of all for stocks.

The data are summarized in the chart, below. (For the statisticians among you: The standard deviation of the Dow Jones Industrial Average’s DJIA, +0.09%   daily percentage changes in past Octobers is 1.44%, in contrast to 1.08% across all 12 months taken together.)


You might think that October is an outlier because of the 1987 Crash; on Oct. 19 of that year the Dow fell 22%. But that year accounts for only a small portion of October’s above-average volatility; October tops the monthly volatility rankings even if we exclude 1987.

To be sure, the data that appear in the accompanying chart are based on more than 100 years of history, and there is considerable variation in the historical record. So there is no guarantee that the stock market in October of this year will experience above-average volatility. But you probably should be prepared for it nonetheless, since — compared to price trends — volatility trends in the stock market tend to be relatively predictable.

How should you prepare for a volatile October? Probably the best way is to resolve not to panic if and when there is a spike in volatility. Despite the month’s dubious honor at the top of the volatility rankings, for example, its average performance is no worse than average — in seventh place, in fact, when ranked according to average Dow performance since that benchmark was created in the late 1800s. Since 2000, furthermore, October is in third place in a ranking of monthly performance, with an average gain of 1.84%.

Another factoid that may help you stay the course in the face of a spike in volatility: far more bull markets have begun in October than have ended. This, by the way, is the source of October’s reputation as a “bear killer.”

Consider the bull market calendar maintained by Ned Davis Research, according to which there have been 35 bull markets since the beginning of the last century. No fewer than eight of those bull markets began in October. If bull market beginnings had been randomly distributed across all months of the calendar, fewer than three would have begun in October.

To be sure, no one way is saying that we’ll see a new bull market begin this October. But it’s worth noting that a below-average number of bear markets have begun during the month—just one of the 35 in the Ned Davis calendar did so, in fact.

The bottom line: The stock market is due for a wild ride in October, but its volatility is not likely to spell the end of the bull market.

From MarketWatch