October Seasonals: Trick or Treat?

October 3, 2024

7 minute read

by George Smith, Portfolio Strategist, LPL Research

September didn’t live up to its reputation as a scary month for stocks. As the calendar now turns to October, we examine seasonality data to assess whether the month is more likely to deliver a trick or a treat for stock market investors.

After an extremely poor start, during which stocks — as measured by the S&P 500 Index — were down over 4% and saw the worst weekly return since early 2023, this September eventually bucked the historic seasonal trend of being the worst month of the year for stocks and finished up by over 2%. Stocks were boosted over 6% from the intra-month lows by an aggressive 0.5% rate cut from the Federal Reserve (Fed).

October has generally not been a scary month for stocks, with the S&P 500 generating an average return of almost 1% over longer time periods. Over more recent periods, October has been even more of a treat for investors, with an average gain over the past 10 years of 1.6%, and over the past five years of 2.4% (the third best month during both these periods, behind only November and July).

October Has Been More of a Treat Than a Trick for Equity Investors

Source: LPL Research, FactSet, Bloomberg 09/30/24 (1950–current)
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

Analyzing the data by the frequency of positive monthly returns shows October is quite middle-of-the-road. The S&P 500 has generated a positive return almost 60% of the time since 1950, near the long-term average over all 12 months, and much better than spooky September’s 43% positive rate (the lowest of all months).

October is a Big Improvement on September’s Frequency of Positive Monthly Returns

When considering seasonality slightly further into the future, the two-month October-November return window is the strongest over the past five and ten years, and second-strongest over the past 20 years and all periods back to 1950. November is the strongest month based on data to 1950, with December second; as such, it is no surprise that November–December (sometimes including the “Santa Claus Rally”) is the strongest two-month period over that longer-term period - bringing festive cheer to stock market investors. The fourth quarter is also the strongest quarter for stock market returns over all the time periods studied (including an impressive 9.8% average quarterly gain over the past five years), though in presidential election years the average 2.5% fourth-quarter gain does trail the second quarter (+2.8%) as the strongest.

October–November Has Been the Strongest Two-Month Window Over the Past 10 Years

It would not be October without some scares, though, and the effect of the presidential cycle on longer-term seasonality potentially warrants some “Octoberphobia” to counter the positive seasonality trends highlighted above. Looking back to presidential election years since 1950, the average return in October has been negative (-0.85%) and October is the worst month of the year. In presidential election years, only half of the Octobers since 1950, and only one of the past six (2004), have finished in the green for the month. Markets crave certainty, and given the high degree of uncertainty in the weeks leading up to presidential (and House and Senate) elections, it's unsurprising the trend is for markets to wobble and volatility to increase. Interestingly, the reverse is true in midterm years, with midterm year October’s being the strongest month overall, and there being only one negative midterm October since 1990. Year two of the presidential cycle is the weakest, with only one positive month on average for stocks between April and September, so the midterms may come as a belated cure for political uncertainty that has been brewing throughout the year. In the final stages before midterms, incumbent administrations may also push for policies (to at least be announced) that stimulate the economy and improve market performance, to boost their party's electoral prospects.

October Slightly Spookier for Stock Investors During Presidential Election Years

This year has been well above average in terms of the magnitude of stock market performance, but directionally it has been typical of a presidential election year — overall positive with a summer dip. If 2024 follows a similar pattern, then we could notice stocks struggle through October until much closer to the election. In election years, on average, stocks typically find a bottom from these late summer jitters right around a week before the election, as the forecasting of the outcome becomes more accurate closer to Election Day. The chart also demonstrates that in midterm election years, on average, stocks traded underwater for much of the year before popping just before the midterm election into the strong fourth quarter period.

On Average, Stocks Hit a Short-Term Bottom Right Before the Election

Summary

In general, October has proven more of a treat than a trick for stock markets, but in U.S. presidential election years the month can be a little scary for investors as markets struggle to come to terms with the uncertainty of the election results. Fed rate cuts in September boosted stocks during what has been a historically weak month for stocks, but after five straight positive months, we would not be surprised if we see at least a consolidation in October as markets take a breath ahead of the election.

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) continues to maintain its tactical neutral stance on equities. However, we do not rule out the possibility of short-term weakness, especially as geopolitical threats in the Middle East escalate. Equities may also readjust to what we expect will be a slower and shallower Fed rate-cutting cycle than markets are currently pricing in, although both post-election and fourth-quarter seasonality are favorable for stocks.

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Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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