“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” — Mark Twain
After six straight months of equity gains for the S&P 500 Index and one of the least volatile quarters ever, the historically volatile October is living up to its name. However, earnings continue to be very strong, and we see very little reason to expect a recession over the next 12–18 months. By no means are investors out of the woods yet, as we wouldn’t be surprised to see more weakness and volatility before the midterm elections. Remember, the S&P 500 dropped for nine straight days ahead of the U.S. election in November 2016. Nevertheless, there may be a silver lining for the bulls.
As our LPL Chart of the Day shows, the majority of stock gains in midterm years have come late in the year. “Midterm years have tended to be the most volatile out of the four-year presidential cycle, and wouldn’t you know it, nearly all the gains for the year tended to happen in the final few months,” explained LPL Research Senior Market Strategist Ryan Detrick.
On average, the S&P 500 actually has been negative year to date ate in early October during a midterm year. Importantly, markets can be jittery ahead of major events like elections. Once the uncertainty is resolved in November, solid fundamentals and strong seasonals could take over for a nice year-end rally.
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