Why I’m Not Scared Of A Shocking October

FYI | Sep 30 2020

By Peter Switzer, Switzer Report

7 reasons why I’m not scared of a possible stock-shocking October

September has virtually gone and there has been no stock market crash! So far, so good. But October has had some real doozies when it comes to crashes.

This month of October has had The Panic of 1907, the Great Depression’s Stock Market Crash of 1929, Black Monday 1987, and the GFC Crash, which fell 22% from September 2008 to November and kept falling all the way to March 2009. That was a 45% leg down!

The fact that stocks fell so much, even across the usual great months of November to February, was because of the exact reason I don’t expect this to happen this year.

S&P 500 Index

More on that in a moment.

The following chart shows you what’s generally the case for stocks on an annual basis. The period May to October is historically challenging for stock players but November to April tends to be a rewarding time to believe in the returns of the stock market.

However, election years can be a problem. 2008 was the year Barack Obama defeated George W. Bush. So the upcoming poll, Donald Trump versus Joe Biden, could be a cause for concern, especially with the former not promising to lose graciously if that happens to be his fate!

Global Stock Markets

Source: CNBC

This chart looks at 37 markets but most experts will tell you the key driver of these markets is what’s happening on Wall Street. You know the old saying: “When Wall Street sneezes, the world catches a cold.”

And in 2020 with the US election looming on November 3 and the world hoping the Yanks tell us ASAP that they have a vaccine and it will be available by the start of 2021, Wall Street will set the tone for stocks here and abroad, especially after early November.

Why are stocks so crash vulnerable in September and October for the US?

Market experts around this time of the year talk about the October effect, which Investopedia says “refers to the psychological anticipation that financial declines and stock market crashes are more likely to occur during this month than any other month.”

Interestingly, September has more down-market experiences on a monthly basis but the biggies are in October.

In case you missed it, for the US market, September this year has brought nearly an 8% slide for the S&P500. But you might have missed August’s showing, where the Index was up over 7%, which was the best for the month since 1984.

“This represents the first August on record that saw two separate six-day win streaks,” LPL Research explained. “But what follows a strong August tends to be a weak September. Since 1950, September has been the worst month of the year for stocks on average. And when August is a particularly strong month, September is an especially bad month for stocks.” (Business Insider)

And election years actually add to the drama.

“What caught our attention was both September and October have a negative return during election years, with October the worst month of the year,” LPL’s chief market strategist, Ryan Detrick underlined.

This is why I’m not breaking my neck to buy stocks now. But it does make me ask: “Should I gamble and buy ahead of the US poll?

That’s a good question that I will address before I sign off. But ahead of that, let’s try and ask why September and October have a worrying history?

Given we’ve got through September without a crash, that should be seen as a good sign.

“September is historically the worst month of the year for stocks on average since 1950,” says W.E. Messamore of ccn.com. “There are many theories why. One goes that money managers back from vacation in the summer exit all the positions they were planning to sell. But whatever the reason, equities are usually on sale in September.”

Personally, I like this reason for a September sell off. Big mutual funds in the US cash in their holdings to pocket tax losses typically sell losing positions before year end, and this trend is another possible explanation for the market’s poor performance during September.

According to Investopedia, the interesting issue is that: “October has historically heralded the end of more bear markets than the beginning. The fact that it is viewed negatively may actually make it one of the better buying opportunities for contrarians. Slides in 1987, 1990, 2001, and 2002 turned around in October and began long-term rallies. In particular, Black Monday 1987 was one of the great buying opportunities of the last 50 years.”

From the chart above, you can see that it’s interesting to note that our market (in red) does well after the tax month of June, while the US market (in blue) does well in October, after its tax month of September. It’s why I think the tax cause bumping into a major problem like a sub-prime problem caused the GFC crash.

Also, the extended crash in the US with the GFC was made worse because of the election and stimulus was delayed until Obama was fully into the White House.

This US election could bring problems, especially when you throw in a ‘little’ challenge such as the Coronavirus!

The courageous investor will be buying in October hoping a Biden win won’t bring a Trump problem.

The LA Times last week had this worrying headline: “What if Trump loses but won’t concede? How a constitutional crisis could play out.”

The story went: “As President Trump, backed by his army of attorneys, has laid groundwork to undermine an election result that does not cast him as victor, Republican lawmakers found themselves in the astonishing position Thursday of having to reassure Americans there would be a peaceful transition of power should he lose.”

Only in America!

I think stocks will head up in 2021 and here are my reasons:

  1. The world has been doing OK with second wave COVID-19 infections but I wish it was better.
  2. Vaccine stories are promising and could alleviate concerns over second wave infections.
  3. The monetary and fiscal stimuli from governments worldwide is extraordinary!
  4. A big global economic recovery is expected in 2021.
  5. China is starting to grow quickly.
  6. Interest rates are unbelievably low and are tipped to be lower for longer and so stocks look attractive.
  7. If you took out the hyped tech stocks and those helped by the lockdown and the working from home trend, there are a lot of companies that will be attractive when a vaccine permits the normalisation of economies.

Any fight over the White House would KO stocks, short term. On the other hand, a Trump victory would be cheered by Wall Street, though a Biden victory could be even better received as the Democrats are promising a bigger stimulus package, which the US economy really needs.

If good news trumps bad news from November on, then I expect stocks to be very rewarding, rolling across the festive period into 2021. That means October, for the courageous contrarian, might be a good time to buy. For the less courageous, you might have to wait for November and buy when the trend says it’s safe to buy. But you will miss the first kick up. This could be quite big, if vaccine news is very positive.

To sum up, I like the fact that AMP Capital’s Shane Oliver agrees with me about stocks going forward. This is what he predicted recently: “On balance the positives dominate in our view. Shares remain vulnerable to short term setbacks given uncertainties around coronavirus, the speed of economic recovery, the US election and US/China tensions. But the positives should keep any pull back to being a correction and on a 6 to 12 month view shares are expected to see reasonable returns.”

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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