October is a puzzling of months for investors. On the one hand it has a reputation for volatility – and this is well deserved. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October! The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And, additional bad news for investors: since 1970 the average return in the month has been just 0.3%, ranking it 9th of the 12 months. However, things have changed in recent years.
Although the market occasionally suffers large falls in this month (as can be seen in the accompanying chart), for the most part the market posts a positive return. In fact, in the last 23 years the market has only fallen five times in October – this is a performance only bettered by December. In recent years the market has posted an average return of 1.5% in this month (albeit with a very high standard deviation) – ranking it 4th for monthly performance.
But the record of October is less good outside of the UK. An academic paper of 2013 analysed 70 of the 78 operational stock markets around the world and found that October was the third weakest month of the year on average for the 70 markets. Only in Bangladesh was October found to be the strongest month.
The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.7 percentage points in October.
The average October
In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month – with the last trading day (LTD) being the strongest monthly LTD of the year.
Sell in May
October is important as marking the end of the weak six-month period of the year (which starts with “Sell in May”). So this month investors may be looking to increase their exposure to equities anticipating the coming strong six-month period November-April; which might partly explain the last trading day of October which is the strongest last trading day of a month in the year.
Dates to watch out for this month are: 2 Oct – US Nonfarm payroll report (anticipated), 8 Oct – MPC interest rate announcement at 12 noon, and 27 Oct – two-day FOMC meeting starts.
Article first appeared in Money Observer
Further articles on the market in October.