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We have often heard investors refer to October as being one of the worst months to invest in the stock market. To the degree that we have even witnessed investors hastily move their investments to cash. Perhaps this lies in some deeply rooted market fears that can be traced back to Black Monday, when on October 19th, 1987 the U.S. stock markets lost nearly -22% in a single day of trading. Whatever the cause for trepidation may be, the reality is that over the past 25 years October has actually been one of the best months to be an investor in domestic equities.
After two consecutive months of negative returns for the S&P 500, investors entered October 2015 spooked by such technical omens as a break in the 200 day moving average, a death cross, and the Hindenburg Omen, among others. And yet, after all of the technical damage that had been wrought in recent weeks the S&P 500 managed to shock us all by turning in the best October return since 2011, up +8.44% for the period.
While that last statistic may not sound overwhelmingly impressive, one must further consider the context. That unexpected +8.44% monthly return was actually the third best October return in the past 25 years! Perhaps even more incredulous is the fact that that was actually the 7th best return generated in any month over the past 25 years period (including the “go-go” markets of the 90’s)! In other words, out of the past 397 months of S&P 500 returns, last month’s return came in 7th. And let’s be blunt, no one saw it coming.
In October of 2011, the S&P 500 generated the highest return of any month over the past 25 years, up +10.93%. This came after 5 consecutive monthly losses over which the S&P 500 suffered a cumulative decline of -16.26%. Losses over this period were exacerbated by an August S&P downgrade of U.S. long-term debt from AAA to AA and growing fears that the Euro may break up, all of which led to capitulation by worrisome market participants. As is the case in most instances, the markets overreacted to the downside and rebounded with strength shortly thereafter.
In October of 2002, the S&P 500 generated the 2nd highest October return over the past 25 years, up +8.80%. This came at the height of the bursting of the Tech Bubble, where over the prior five month period the S&P 500 experienced an outsized cumulative loss of over -28%. So here again, we witnessed capitulation followed by a strong rebound.
Even coming out of the Great Recession, when in early March of 2009 we finally found our bottom, the S&P 500 generated a monthly return of +8.76%. However, this strong return to the upside only came after the markets had lost a gut wrenching -41.83% over the prior 6 month period.
So forgive us if we find it somewhat peculiar that the S&P 500 was up over 8% last month. In nearly every instance in which returns of this magnitude have been generated in a single month over the past 25 years, they have come only after the markets had suffered significant losses. While we recognize losses of any size may be difficult to bear, a loss of slightly more than 8% over a two month period is exceedingly commonplace in the stock market. What is uncommon are returns north of 8% in a single month without coming after significant losses.
In 2002 when October returns were this strong, the S&P 500 still finished down -22.10% for the year. In October of 2011, when the S&P 500 posted it’s strongest monthly return over the last 25 years, the S&P 500 finished up a modest +2.11% (all of which was attributable to dividends, without them the return was actually 0.0%). Where we end up for 2015 is really anyone’s best guess, but after taking a look at monthly returns over the past 25 years, it should be clear to see that volatility has increased and the markets appear undecided for the time being as to whether our next leg will be up or down. It should also be clear that listening to the noise that is so widely disseminated in our industry, should largely be ignored. What is more important is that investors follow an investment discipline devoid of emotional influence.
With that said, we would be remiss if we did not impart a word of caution regarding our current investment environment. One should be weary of market head-fakes, as the markets in 2015 have grown increasingly prone to lead investors in one direction, only to quickly reverse course. Adding new monies into equities at this time may very well prove to be an exercise and lesson in chasing returns.
For tactical investment managers, employing an asset rotation based investment approach, whipsawing markets such as we have seen thus far in 2015 can prove to be challenging, as underlying trends become less stable. However, if executed properly the purpose of reducing volatility in returns and achieving low correlations to both the equity and bond markets should be evident. For those unfamiliar with tactical portfolio management, you may refer to our previously published article on SeekingAlpha, How To Beat The Market With Tactical Asset Rotation or our recently published book by Wiley & Sons, “Asset Rotation”. In each we illustrate a rudimentary approach to tactical portfolio management and provide a root foundation for understanding the benefits of this type of investment philosophy.
Lastly, since we have attached a table with monthly returns on the S&P 500 for reference pertaining to this article, there are a couple ancillary points we will leave you with that may surprise you:
- Over the past 25 years, October has generated a negative monthly return only 7 times (tied for third best).
- 3 out of the 7 best monthly returns over the past 25 years have come in October.
- Surprisingly, July and September posted monthly losses in 12 out of the past 25 years (tied for the worst month for investors over the period).
- Never underestimate the power of the jolly fat man… December has posted a negative rate of return in only 4 out of the past 25 years (by the far the best month for investors over the past 25 years).