Despite horrors, October’s been fair to markets

WE are coming up on a seasonal turning point in the stock market. October is special for three reasons: It is the month when history’s most spectacular market crashes have occurred, most famously in 1929 and 1987. Yet it is actually, on average, a pretty good month.

Based on historical price patterns, stocks are likely to chug ahead in the fourth quarter.

Let’s look at this a little more closely.

Crashes

Few people alive today remember the crash of 1929, but we all learned about it in school, or from studying market history. The Dow Jones Industrial Average lost 12.8 percent on Monday, October 28, 1929, and another 11.7 percent the next day. The Great Depression followed.

Fast forward 58 years to 1987. The industrial average lost 22.6 percent in a single day, the worst one-day crash ever.

Those were the three worst October crashes, but not the only ones. Seven of the Dow’s 10 worst days occurred in October.

October performance

Despite October’s fearsome reputation for being crash-prone, it is usually not a bad month. It has averaged a 0.6 percent price gain from 1928 through 2022, according to Yardeni Research.

Annualize that and you get 7.2 percent. That’s the same as March or August, and about middle of the pack.

The four best months are July (20.5 percent annualized), April (16.8 percent), December (15.6 percent) and January (14.4 percent).

Three months have averaged negative returns. September is the worst, annualizing to negative 13.2 percent. February and May average negative 1.2 percent annualized.

Oh and if you must know, the returns for the remaining months are 9.2 percent annualized for June, and 10.8 percent for November.

Bear in mind that these are just averages, or tendencies. They are not even within a stone’s throw of being guarantees.

Fresh worries

Will this October follow the typical pattern and end up with a moderate gain?

Pessimists can point to a number of special factors that could poison the market’s performance this month. 1. The United Auto Workers are striking against General Motors, Ford and Stellantis. 2. A government shutdown looks likely. 3. Interest payments on student loans resume in October.

Then, too interest rates are fairly high, and the Fed thinks it may ratchet them up one more notch this year.

Historical patterns

Ned Davis Research Inc. annually produces a “Cycle Composite,” which is an equal-weighted melding of three separate cycles, the one-year cycle, the four-year Presidential Cycle, and the 10-year cycle. This year, the model suggests a fourth-quarter rally, accelerating toward the end of the year.

Also, the firm notes that the vast majority of the stock market’s gains occur in November through April.

A $10,000 investment made in 1950 in the Standard & Poor’s 500 Index would have appreciated only to $14,590 by year-end 2022 if invested only in May through October. But if invested from November through April, it would have appreciated

to $928,356.

Suggested stocks

If you want to add to your stock-market exposure during October, or to replace some of your current holdings, here are a few stocks to consider.

W.R. Berkley Corp. (WRB), based in Greenwich, Connecticut, writes several types of commercial casualty insurance. It has been profitable 21 years in a row, and posted a 19 percent return on stockholders’ equity in the past four quarters. The stock sells for 14 times earnings.

Alliance Bernstein Holding LP (AB) is an investment management company with a good reputation. It’s known as a value shop, and value has lagged behind growth as an investment style in recent years.

Titan International Inc. (TWI) makes wheels, tires and undercarriage systems for tractors, earth movers and other off-road vehicles. A small-cap stock, it’s barely covered on Wall Street.