A few weeks ago, I wrote about the most negatively seasonal period of the year for stocks, coupled with strongly negative trends post the Fed meeting and September options expiration. And let's not forget that the market worried about the Scottish vote and the Alibaba IPO as well. From that time until now, the widely watched S&P 500 has pulled back 4% while the broader market indexes are down much more. I would not call that an overpowering market or ringing endorsement for the bulls.
The short-term picture remains murky for the next few weeks but looking out beyond that, markets should regain their solid footing and march higher later this quarter. October has a reputation of being a bad month for stocks. Most people recall the great crash of 1929, crash of 1987, mini-crash of 1989, crash of 1997, crash of 1998 and Lehman collapse of 2008, which all occurred in October. Keep in mind that some macro news event usually was given the credit (or blame) for causing the decline. Isn't that always the case? In a vacuum, October looks like a very scary month, but that would be a big mistake!
(Related read: Stocks entering spooky time of year but no time to worry)
Taking a wider view, you realize that in almost every case above, stocks were already in decline before October began. The month actually acted as an accelerator rather than an initiator. Furthermore, October was most often a turning point for stocks in that declines continued into October, bottomed mid- to late-month and then began a significant rally. You would be hard-pressed to find many examples of times when at least an interim low was reached in October.
Given that stocks peaked last month, I went back and researched how the market behaved in the fourth quarter after a new high in September. The results may surprise you:
• Since the bull market began in 2009, the only significant 4Q decline was in 2012, -8%, or 1/5 times (20%).
• Since 2000, besides 2012, 2007 was the only other year. The Dow peaked in October and declined 11%. That's just 14% of the time.
• There were no 4Q declines from a September or October peak in all of the 1990s. Read that sentence over again.
• In 1989, the market suffered a mini crash of 9% from an October peak, and in 1980, the market had a very unusual 10% drop from a November peak.
• Since 1980, there five significant 4Q declines from a high or just 15% of the time.
So here we are on Oct. 8, having seen a September new high peak heading into the fourth quarter.
History suggests there is a 15% chance of 8% to 11% decline from the September Dow high of 17,280. If this is one of those times, the Dow is looking at a possible downside range of 15,379 to 15,898. Anything else on the downside would be a 35+ year precedent setter. (On Tuesday, the Dow finished at 16,719.)
Paul Schatz is president of Heritage Capital.
