Is the stock market primed for an October swoon? Why investors shouldn't fear the frightful month.

·6 min read

While October is often considered a spooky month for investors, earning a bad reputation following the crashes of 1929, 1987 and the global financial crisis in 2008, investors shouldn’t be so fearful.

Since 1950, October ranks as the seventh-best month, while in the past 10 and 20 years, it ranks as the fourth-best, according to LPL Financial.

So while the 31-day stretch isn’t one of the best months of the year, it’s not the worst, either.

Still, some investors are jittery after September proved to be the worst month for the Dow Jones Industrial Average in nearly a year, while the S&P 500 recorded its biggest monthly loss since the start of the coronavirus pandemic.

More proof of October’s historic volatility came Friday when the Dow surged more than 480 points after drugmaker Merck announced progress in the development of an oral COVID-19 drug, which boosted investor optimism. Despite the gains, stocks still closed lower for the week, with the S&P 500 posting its worst weekly drop since February.

“October is known for some spectacular crashes and many expect bad things to happen again this year,” Ryan Detrick, chief market strategist at LPL Financial, said in a note to clients. “But the truth is this month is simply misunderstood, as historically it is about an average month.”

In fact, September has actually been the worst month for the stock market, averaging a 0.4% decline, according to the Stock Trader’s Almanac. And it lived up to its reputation again this year.

Stock photo.
Stock photo.

Why investors are spooked this month

Although Congress averted a government shutdown Thursday just hours before a midnight deadline, investors continue to wait for lawmakers to reach a deal on the national debt ceiling before the U.S. government runs out of money to pay its bills.

The debt ceiling is viewed as a greater economic threat if Congress fails to suspend or raise the U.S. borrowing limit before Oct. 18, which would result in a historic default and damage the financial system. While risk remains, analysts widely believe a deal will likely get done before then.

In addition to the debt ceiling debate in Washington, investors have already been weighing a string of concerns, including higher interest rates, the spread of the COVID-19 delta variant and indebted real estate developers in China.

This came as a shift had already taken place beneath the stock market's surface in recent months, with fewer stocks participating in the market rally, a trend that is often viewed as a warning sign for investors that a potential pullback is coming.

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That weakness also signaled a pessimistic shift in investor attitudes after they remained largely euphoric in the market boom at the start of the year. There has been a wave of fear of missing out to cash in big on everything from GameStop to cryptocurrencies during the rebound.

In September, the blue-chip Dow slumped 4.3%, its biggest loss since October 2020.

The S&P 500, meanwhile, slid 4.8% in September, its first monthly drop since January and its largest since March 2020, when the COVID-19 pandemic first battered financial markets and the global economy. Its decline in September left it only 0.2% higher in the third quarter, its smallest quarterly gain since the COVID outbreak began.

To be sure, stocks have posted double-digit gains for the year. The Dow and the S&P 500 have rallied 12.2% and 16%, respectively, so far in 2021.

Why investors shouldn't be fearful

The economy is recovering following last year's recession and corporate profits are growing once again. Despite the challenges with COVID-19, investors are feeling more hopeful about the long-term.

The U.S. economy could benefit from a further spending boom as businesses reopen, fueled by reduced coronavirus fears, steady household incomes and bigger savings accounts. As the economy recovers and more Americans are vaccinated, the current bull market has more room to run and could further add to the value of Americans' 401(k) plans, experts say.

Since World War II, economic expansions, on average, have lasted more than five years. That suggests the stock market could be poised to keep climbing in the final months of 2021 and beyond as the economy recovers.

“I don’t see a recession coming,” says Liz Young, head of investment strategy at SoFi, an online personal finance company. “This volatility could last during the fall, but I still expect that the stock market will end higher this year, and things may feel more optimistic by December than they do now.”

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After a historic crash in March 2020, stocks staged a rally of nearly 100%, reaching record highs following unprecedented aid from the Federal Reserve and Congress to shore up the economy during the global pandemic.

On Thursday, the S&P 500 slid more than 5% from its all-time high set on Sept. 2, the first time that has happened since September 2020. That's a long stretch of stability. Typically, the broad index falls 5% or more two to three times a year.

That means stocks were likely overdue for a pullback following a strong run, analysts say, which would benefit people who avoid the market during the market turbulence last year and lost out on hefty gains. It would also help people who want to continue piling money into their retirement and investing accounts, according to Young.

“The market was due for some volatility," Young added. "Pullbacks and drawdowns in the stock market without a recession are typically buying opportunities."

Following Friday’s rally, the S&P 500 is 4% away from its record high. Both the Dow and the Nasdaq are off 3.7% and 5.3% from their respective peaks.

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Stocks kicked off a new quarter Friday. The fourth quarter is typically the best for stocks, rising 3.8% on average during the final three months of the year, according to LPL Financial. The past seven times the S&P 500 was up 15% year-to-date heading into this period, the final quarter of the year was higher every single time, up 5.8%, the data showed.

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So although October is known for its turbulence, investors may want to pad their retirement savings and use any potential market drops as a chance to scoop up shares should there be any October scares that drop stock prices, financial experts say.

“October often evokes fear on Wall Street,” Jeff Hirsch, editor of the Stock Trader’s Almanac, said in a note to clients. But he added that “should a meaningful decline materialize in October, it is likely to be an excellent buying opportunity.”

This article originally appeared on USA TODAY: Stock market primed for October swoon? Investors shouldn't be fearful