What October Has in Store for the S&P

Today we look ahead… by first looking back…

The S&P surged 7.2% April through September — its mightiest quarterly gain since 2013.

And for only the sixth occasion since 1928… the broad index ended each month higher than the previous.

Meantime, the Dow Jones worked a roaring 9.3% third-quarter gain, the Nasdaq a handsome 7.1%.

But what does the foregoing imply for this month of October, with its blackened reputation for crashes?

Will more records fall over… or does history argue for another crash?

This is the question that furrows our brow today…

Here in Baltimore we still await autumn’s first chill.

Temperatures linger in the 80s, and the overworked fan we’ve enslaved is mouthing off about its rights under United States labor law.

But let it pass.

After a scorching third quarter, the stock market has also opened October in high temperatures…

The Dow Jones was up 193 points yesterday.

A breakthrough trade deal with Canada is the explanation in general circulation… a deal President Trump assures will vastly benefit Americans.

The Dow Jones was up another 123 points today, though the S&P and Nasdaq ended the day slightly negative.

But what about the rest of October — and the rest of the year?

The analytical men at Bespoke Investment Group have crunched the numbers…

In the five previous instances when the S&P rose each month April–September, October has been positive for four of them — 80% of the time.

The average October gain under these conditions is a hearty 2.38%… compared with a 0.61% return for October overall.

If the analysis holds, you can expect a lovely October for the S&P.

“Gains beget gains!” the Bespoke folks assure us.

Just so.

But what about the rest of the year?

The getting gets even better, as MarketWatch summarizes Bespoke’s findings:

A solid AprilSeptember performance also has been a positive signpost for market performance in the fourth quarter, with stocks notching an average rise of 9.2% in the final three months of the year.

But may we introduce an unpleasant variable to the proceedings?

Next month brings the midterm elections — widely considered a referendum on the sitting president.

History says the midterms usually hand the incumbent president’s party a good hard shellacking…

For the past 21 midterm elections, the sitting president’s party has lost an average 30 seats in the House of Representatives… and four seats in the Senate.

Online betting forum FiveThirtyEight currently gives the odds of Democrats seizing the House at 76.3% — in favor.

How does the S&P fare in Octobers preceding midterm elections?

Grandly, says Ryan Detrick, senior market strategist at LPL Financial — at least since 1950.

The S&P has risen an average 3.3% — even higher than the 2.38% October performance above described — and miles beyond the usual 0.61%.

Now, it is true…

This is no usual midterm election for the simple reason that the incumbent president is no usual incumbent president.

Rumors swirl that a Democratic House may initiate impeachment proceedings against the president… and heave the nation’s capital into chaos.

Chaos has its points — its entertainment value alone can vastly exceed the costs.

But markets have a bias for the stable, the known — the unrocked boat.

How would they react to a Trump impeachment?

We may have an answer soon enough.

But what’s this, an additional portent of trouble?

We are informed, reliably, that markets are worryingly short of liquidity.

The Federal Reserve is scheduled to drain $50 billion by way of quantitative tightening this month — its largest reduction to date.

And as the fine people at Phoenix Capital remind us…

The European Central Bank is scheduled to halve its QE injection to a mere 15 billion euros this month — its smallest injection since January 2015.

This October the Bank of Japan is also scheduled to halve QE for its longer-duration bonds.

In summary, says Phoenix Capital:

October will mark the lowest amount of central bank liquidity hitting the system in nearly FIVE years.

Meantime, the number of global rate hikes is fast approaching the figure that immediately preceded the 2008 crisis.

That is, the Federal Reserve is not the only central bank raising interest rates.

“Given this tightening,” the Financial Times reports, “global liquidity has contracted quite substantially.”

We do not pretend to know when the receding liquidity tide will impact markets… only that the day will not be forever put off.

But if market history holds this October, it may be a worry for a later day…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning