October will be a tense month for investors.
European leaders will struggle to sell the debt crisis fixes they have negotiated among themselves to their respective parliaments and electorates. Greece may meet its deadline for payments in time, but a default is looking increasingly inevitable. And a bilateral U.S. congressional committee will struggle to find $1.5-trillion (U.S.) in savings over the next decade in time for a Nov. 23 deadline.
Figuring out how markets will react is nearly impossible. So it might be a good time instead to look at some historical patterns for the month. October has a history of being the most volatile month of the year for stocks, but statistically it has also been a good time to buy U.S. equities.
Many investors equate October with market crashes. There were the massacres of 1929 and 1987, as well as market disasters during this month in 1978, 1979 and 1989. During the financial crisis in 2008, the Dow Jones industrial average suffered its worst single week in history, losing 18.2 per cent over the five sessions ended Oct. 10.
But October should really be thought of as a "bear killer," because it has been the transition month from bear to bull in 11 cycles since the Second World War, according to Jeffrey Hirsch and Yale Hirsch, authors of the Stock Trader's Almanac.
Between 1950 and 2009, the Dow posted monthly gains in October 34 times, rising on average by 0.3 per cent. The S&P 500, meanwhile, racked up an average October gain of 0.6 per cent, according to the Almanac.
Canadian stocks, however, haven't held up well in the autumn in recent years. Between 2000 and 2009, the average October performance of the Toronto Stock Exchange has been a decline of 1.6 per cent, according to Brooke Thackray, Canadian-based author of Thackray's Investor's Guide.
Within the U.S. market, consumer staples and information technology have led October's market between 1990 and 2009, seeing an average rise of 2.6 and 2.5 per cent, respectively, Mr. Thackray writes. This "odd couple" generally perform well because October's volatility drives investors to seek stable earnings from consumer staples. At the same time, many traders establish positions in information technology ahead of the fourth quarter, that sector's strongest selling season, he says.
It's not just tech that has a habit of doing well in the fourth quarter. The last three months of the year have traditionally been the strongest for the S&P 500, which has risen 76 per cent of the time since 1962 with an average gain of 3.5 per cent, says Kevin Pleines of the money management and research firm Birinyi Associates Inc.
Health care, staples and technology historically outperform in the fourth quarter, he adds.
September's dismal performance seems to throw some of these historical patterns into doubt for 2011. The S&P 500 dropped 14.3 per cent in the third quarter, the largest such drop since 2008. But Mr. Pleines says that after a quarter with a loss of more than 10 per cent, on average the S&P 500 has delivered gains of 5.5 per cent the subsequent quarter, 80 per cent of the time.