The TSX outlook looks bright for October – especially for one sector

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Canada's benchmark stock index has been trending up since the end of January, with year-to-date gains now surpassing 13 per cent.

Those bracing for a pullback can take comfort. If history repeats itself, this positive momentum should continue in October. And, for those who believe in such seasonal trends, there's one sector in particular that has a remarkable track record of making money for investors.

First, the overall picture. Looking at the historical performance of the S&P/TSX composite index in October going back to 1990, the average price return has been 0.8 per cent for the month, not including dividends, according to Bloomberg data. If you exclude the years 2008 and 2009 – when the country was in a recession and struggling to economically recover – the index has returned an even more respectable 1.7 per cent.

During 17 of the past 26 years, or 65 per cent of the time, the monthly price return has been positive. Furthermore, 15 per cent of the time, the gain has been strong, in excess of 5 per cent.

When returns were negative, which occurred just 35 per cent of the time, the losses were generally muted. In fact, there were only four instances when the TSX index fell by more than 3 per cent. Not surprisingly, two of those were in 2008 and 2009, and the other two were in 2000 and in 2005, when the technology bubble burst.

Even without considering historical moves, the risk of a major, long-lasting pullback seems remote. Economic growth is tepid, but positive and the outlook is encouraging. The July monetary policy report released by the Bank of Canada forecast economic growth of 1.3 per cent in 2016, expanding to 2.2 per cent in 2017. In addition, many commodity prices appear to have bottomed and low bond yields make equities an attractive asset class to be invested in.

As well, stock market valuations do not suggest we are in an overheated market in Canada. The TSX index is trading at a price-to-earnings multiple of 16 times the 2017 consensus forecast, near its historical peak but not overextended. Furthermore, in a few months, valuations will roll forward using the 2018 consensus estimate, bringing the forward P/E multiple down to just under 14 times.

Given this environment, there's reason to believe the TSX index in October may continue to slowly climb the wall of worry higher.

But there's even a better way to play the odds when it comes to positioning. The financials sector stands out when it comes to consistent returns over the past 26 years. It has enjoyed positive returns 85 per cent of the time over that time period. The average price return during October is 2 per cent, and even higher at 3.2 per cent if the years 2008 and 2009 are excluded. There were only four years when the monthly returns were negative: 2001, 2005, 2008 and 2009.

One possible explanation is an absence of earnings reports. Approximately 30 per cent of the members in the financials sector – including the six major Canadian banks – end their fiscal years in October. Their earnings results aren't released until late November or early December. This lack of earnings reports may provide the sector with some stability, along with the attractive yields many of these companies offer.

I also drilled down to individual stocks in the financials sector, looking at what companies most frequently appeared as top performers based on total returns – including dividends – during the month.

Here's what I found: Top performers were Home Capital Group Inc. and Toronto-Dominion Bank. Also, worthy of mention, is Genworth MI Canada Inc. This security was the No. 1 performer in October, 2015 and 2014, and was the second best performer in October, 2013. Furthermore, looking at its year-to-date return, Genworth's solid outperformance remains intact as it is one of the top performing stocks in the sector.

Looking at historical performance is simply one piece of information. Of greater importance when evaluating stock market opportunities is consideration of the current macroeconomic conditions, industry headwinds and tailwinds, and the fundamentals of a company.

For instance, while Home Capital Group has appeared among the top performers for 10 of the past 26 years, this stock's stellar performance has been on hiatus since late 2014 given its lack of earnings growth. In fact, it was the worst performer in the sector in 2015.

The past can be a good predictor of the future so long as similar conditions prevail.

As always, I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.

The author does not personally own shares in any securities mentioned in this story.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market