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What the story says tends to happen after the stock market takes its nasty September losses



September proved to be a tough month for major US equity benchmarks, making it the first losing month for Wall Street since a recovery began in late March.

However, history suggests that a dire September, which is historically the worst performing month of the year for US equities, could be followed by an outperformance of the indices despite October usually being the second worst month of the year.

Wednesday, the Dow Jones Industrial Average
DJIA,
+ 1.19%

DJIA,
+ 1.19%

closed September with a decline of 2.3%, the S&P 500 index
SPX,
+ 0.82%

SPX,
+ 0.82%

was down about 3.9% in the month and the Nasdaq Composite Index
COMP,
+ 0.74%

recorded a decline of 5.2%.

The last time one of these major benchmarks performed poorly in September was 2011, during the European sovereign debt crisis and Standard & Poor’s downgrade of America’s pristine triple-A credit rating.

However, data from the Dow Jones Market suggests that the nagging losses that helped snatch the hard-earned monthly win streak from the March lows, when the coronavirus-induced decline reached its lowest point, must not translate into further massacres in October.

In fact, indices tend to rise in the following month 70% of the time after losses as severe as September this year, based on the last 10 periods where the Dow dropped at least 2%, the S&P 500 marked a September slide of at least 3.5% and the Nasdaq Composite recorded a decline in the ninth month of the year of at least 4.5%.

Overall, however, on a percentage basis, the S&P 500 and Dow tended to decline on average in October. An important point to note is that the relatively short dataset is skewed down by the punitive declines experienced by the market in 2008, when the Dow lost 14.1% in October 2008, the S&P 500 fell by nearly 17% that month and the Nasdaq Composite plunged nearly 18%.

Such declines during the financial crisis dragged down the overall 2008 performance for the Dow, leaving an average loss for the month of October of around 1% and a relatively flat rest of the year at 0.05%. Meanwhile, the S&P 500 index has declines of 1.2% and 2.3% for the rest of the year. However, the Nasdaq Composite tends to gain nearly 4% on average over the October trading period and record 3.6% progress this year (see attached chart).

Dow Jones market data

To be sure, the road ahead for equities looks uncertain in 2020, even as investors cling to hope for a new round of economic stimulus from Washington to combat the adverse effects of the coronavirus on business activity.

The 2020 presidential election and fears that stock prices are outstripping their gains by raising margins have fueled concern of a possible system shock that could punch Wall Street more substantially in the stomach.

But for now, investors may be hoping for a less ominous October, if not a less volatile trading period ahead of the November 3 election.


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