Putting October’s Volatility Into Context

By: Spencer Israel

October is known as being the most volatile month of the calendar, and it hasn’t disappointed thus far.

The first two days of the month have been accompanied by a VIX that has spiked to as high as 21—a 31% bump from September’s close—and major indexes that have fallen by 3%.

Historic October Performance

Market historians know that October is home to four of the worst events in history: The Panic of 1907, Black Tuesday in 1929, Black Monday in 1987, and 2008—in which the S&P 500 had its largest drop on a percent basis during The Great Recession.

And according to LPL Financial, there are more swings of at least 1% in the S&P 500 in October than any other month dating back to 1950.

But historically, October is not as bad as that volatility might indicate. Since 1950 the index has returned an average of 0.9%, according to the Stock Trader’s Almanac. And since 1928 it’s returned an average of 0.4% in October, according to Yardeni Research. Though this makes October the fourth-worst month of the year for the S&P 500, it’s still a far cry from September’s average -1% return.

So, What Can We Expect From This Month?

Based on the past few days alone, it seems likely that volatility will remain elevated. But that’s no guarantee that the market will move in any one direction. For every historical trend that says one thing, there is a trend that says another.

For example, in pre-election years the S&P 500 is flat, returning an average of 0.1% since 1950, according to The Stock Trader’s Almanac. But according to Bespoke Investment Group, since 1983 the index has declined an average of 1.2% in October in years in which it has climbed more than 10% in the first three quarters—as has happened this year.

Neither of these trends really tell us all that much. They don’t account for the macro whirlwinds of a trade war, impeachment investigation, and Brexit. If the first few days of October are any indication, the market is definitely nervous. That’s unlikely to change as the calendar rolls on.

It’d be one thing if there were a vacuum of news catalysts, but that’s not the case.

On the global front, we’ll be closely watching trade developments between the U.S. and China (the two sides are set to meet in Washington Oct. 10-11) and the looming Oct. 31 Brexit deadline. Not to mention the Q3 earnings season, which begins with the financials on Oct. 15 and will kick into high gear in the back half of the month. Consensus estimates predict that corporate earnings will have declined for the third quarter in a row last quarter. Adding to fears is a 2018—the worst Q4 in a decade—that is fresh in everyone’s mind.

All of this brings us to an environment that could end up being favorable for traders but nauseating for investors. It’s early yet, but the ingredients are present for an October that will live up to its billing.

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