Despite the sharp rallies to start the fourth quarter, S&P 500 Index remains firmly entrenched in a bear market with a decline of 20.46% year-to-date. At the end of the third quarter, SPX was down 24.8%, recording one of the worst year-to-date performances in the past ninety years.
Things remain tumultuous on Wall Street and Mainstreet. October tends to evoke fear among investors as previous major stock market crashes have occurred during the month, including 1929, 1987, 1997, 1978 and 1979, 1989, and October 2008.
Some believe the market calamities can be traced to the self-fulfilling prophecy – if enough people believe it, then it must be true.
Understandably it looks grim out there. There are a lot of things that can still go wrong this year, resulting in another stock market selloff.
However, it is encouraging to know the 4-year mid-term election year cycle low phenomenon and the start of the seasonality strength period are around the corner.
The perception of another bearish October may not be entirely correct. Yes, October may be volatile, but it is not the worst month of the year. The dubious honor goes to September since it is the only month of the year that has produced negative returns over time.
Since the mid-1950s, and especially during mid-term election years, SPX performances over the next few quarters have been favorable.
According to the 2022 Stock Trader’s Almanac, when SPX was down on a year-to-date basis heading into the end of Q3, it has gone on to produce impressive returns of over 28% on average over the next five quarters with no visible losses.
Also, the second year of the 4-Year US presidential cycle or mid-term election year tends to be bullish for stocks. Historically, many 4-year stock market bottoms occurred during this timeframe.
Is the stock market setting up for another buying opportunity, coinciding with the 4-year mid-term election cycle low?
Again, according to the Stock Trader’s Almanac study, the timeframe favors the bulls. In the past 23 mid-term election years, the following Q4 was up nearly 70% of the time for average gains of 3%. The first quarter was up only 52% of the time for average gains of 2.7%. The following second quarter was up 65% of the time for average returns of 2.9%, and the third quarter was up 74% for average gains of 12%.
The numbers are considerably better when SPX is down at the end of the third quarter during mid-term election years. Nine midterm years produced impressive rallies. Only one, the 1946-1947 midterm, did not produce an SPX rally.
The fourth quarter was up 89% of the time, averaging gains of 7.6%. Quarter one was up 78% of the time, averaging gains of 6.7%. Quarter two was up 78% of the time, averaging gains of 4.6%, and quarter three was up 89% of the time, averaging gains of 19.2%.
Based on the midterm election year cycle low phenomenon, October appears to be an excellent time for investors to buy as major turnarounds tend to occur soon.
Will another four-year midterm election low bring about a market bottom and the resumption of the long-term structural bull?
October is famously referred to as a bear market killer, resulting in stock market recoveries, including 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011. Seven of the past twelve stock market recoveries occurred during midterm election years.
This October may or may not produce another stock market bottom. However, it may be comforting that the start of the seasonality strength period can help contain the recent persistent selling pressure.