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.
Tomorrow will be the first trading day (FTD) of October.
Since 1984, the FTSE 100 Index has risen on average 0.19% on the October FTD. The index has had a positive return on this day in 60% of years since 1984.
The following chart shows the returns for every October FTD since 1984.
Tomorrow will be the last trading day (LTD) of October.
Since 1984 the market has on average risen 0.51% on the LTD of October, with positive returns in 72% of all years, which makes it easily the strongest LTD of any month in the year.
However, since 2000 the October has not been so strong: chalking up an average increase of 0.07% on the day.
The following chart shows the FTSE 100 Index returns for every October LTD since 1984.
October is the most 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.
The following chart plots the percentage performance of the FTSE All Share Index for each October since 1982. For example, last year in 2012 the market rose 0.9% in October. As can be seen, although the market occasionally suffers large falls in this month, for the most part the market posts a positive return. In fact, in the 20 years since 1993 the market has only fallen four times in October – this is a performance only bettered by December. So, October is a volatile month but also in recent years a profitable one for investors.
One of the strongest – and oddest – anomalies in the stock market is the six-month effect (also known as the Sell in May or Halloween effects). This is where the market over the six-month period November to April greatly out-performs the market over May to October. The difference in performance is so marked that it is debatable whether it is worth even being invested in the market during the summer period. This behaviour, obviously, has not gone unnoticed. Many investors hold off investing in the market until the beginning of the strong six-month period in November. But, investing being a competitive sport, this can encourage investors to anticipate the rise in share prices and get in before the others in November. In other words, this anticipatory buying may be one of the reasons why October has been such a strong month in recent years: as the traditional late-year market rally occurs a bit earlier each year.
In the last couple of decades there have been no sectors that stand-out as consistently strong in the month, but weak sectors include: Construction & Materials, Household Goods and Life Insurance.
October is a quiet month for company results announcements and the only significant economics dates are the MPC interest rate announcement on 10 October and the FOMC meeting starting 29 October.
Since 1984, the FTSE 100 Index has risen on average 0.19% on the October FTD. The index has had a positive return on this day in 62% of years since 1984.
As explained in the 2013 edition of the Almanac, despite its (deserved) reputation for volatility, historically October has been the second strongest month for the UK market.
However, the market does not, of course, increase steadily throughout the month. By looking at the performance of the market in October in past years, a certain pattern of behaviour can be seen.
The following chart plots the average performance of the FTSE 100 Index during October since 1984. For example, since 1984 the index has increased on average by 0.15% on the first trading day of October, and by 0.03% on the second trading day. These average daily returns are used in the chart to plot an average chart of the market for the month (rebased to start at 100).
The chart shows that, historically, the market starts strong in October, generally increasing for the first two weeks (to about the 11th trading day), and then there is a sell-off to around the 20th trading day of the month, when the market rebounds to end strongly.
Why does the market behave like this in October?
There’s no obvious explanation. One reason (and this, again, relies on the strong correlation between the UK and US markets) is that the third-quarter earnings season in the US kicks off around 9 October. So, prices rise in the lead up to company announcements and then sell off on the news. At the end of the month prices may rebound in anticipation of the strong six-month period of the year starting November.
Next Monday (1 October) will be the first trading day (FTD) of October.
In line with this effect, the October FTD tends to be stronger than the average day in the year, but its strength only places October in the middle ranking of all months. Since 1984, the average return for the FTSE 100 Index on the October FTD has been 0.15% (five times the average return for all days in the year), with a positive return in 61% of all years.