We are in the market’s rock’n’roll period of the year. Stock market volatility is fairly even for the first eight months of the year. In other words, historically, from January to August the size of the daily ups and downs of the market are pretty much the same from month to month. But daily volatility starts increasing in September and peaks in October. Since 1984, average daily volatility has increased 50% in this month.
Of course, the 1987 stock market crash greatly influences the calculation of October’s volatility and also therefore its bad reputation among investors. However, this is not strictly fair, as October is one of the stronger months of the year for the market. Since 1984 the average return for the market in October has been 0.8% (ranking it fifth of the 12 months), and over the same period the market’s return has been positive in 77% of years (second only to top month December). As can be seen in the accompanying chart, put 1987 to one side and the record looks pretty positive – the market has fallen in October in only four of the past 22 years.
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 0.8 percentage points in October.
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.
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.
Dates to watch for this month are: 3 Oct – US Nonfarm payroll report, 9 Oct – MPC interest rate announcement, 28 Oct – Two-day FOMC meeting starts.
Article first appeared in Money Observer
Further articles on October.