Is the stock market preparing to swoon in October? Why do investors not fear the dreaded month?
While October is often considered a scary month for investors, gaining notoriety after the crash of 1929 and 1987 and the global financial crisis in 2008, investors He shouldn’t be too scared.
Since 1950, October has been the 7th best month, while in the past 10-20 years, it has ranked 4th, according to LPL Financial.
So while the 31-day period isn’t one of the best months of the year, it’s not the worst either.
Some investors remain nervous after September proved to be the worst month for the Dow Jones Industrial Average in nearly a year, while the S&P 500 posted its biggest monthly loss since the start of the coronavirus pandemic.
More evidence of historical volatility came in October on Friday when the Dow rose more than 480 points after drugmaker Merck reported progress in developing an oral COVID-19 drug, boosting investor optimism. Despite the gains, stocks still closed lower for the week, with the S&P 500 index posting its worst weekly decline since February.
“October has been known for some amazing crashes and many are expecting bad things to happen again this year,” Ryan Detrick, chief market strategist at LPL Financial, said in a note to clients. “But the truth is, this month is simply misunderstood, because historically it has to do with an average month.”
In fact, September has done It was the worst month for the stock market, with an average drop of 0.4%, according to a stock trader’s calendar. And it lived up to its reputation again this year.
Why did investors panic this month
Even though Congress avoided a government shutdown on Thursday just hours before the midnight deadline, investors continue to Wait for lawmakers to reach an agreement on the national debt ceiling before the US government runs out of money to pay its bills.
The debt ceiling is seen as a greater economic threat if Congress fails to suspend or raise the US borrowing limit before October 18, which would trigger a historic default and damage the financial system. While risks remain, analysts widely believe the deal is likely to close before then.
In addition to the controversy over Washington’s debt ceiling, investors were already weighing a series of concerns, including rising interest rates, the spread of COVID-19 variable delta and debt-laden property developers in China.
This came as there has already been a shift under the stock market’s surface in recent months, with fewer shares participating in the market rally, a trend often seen as a warning sign to investors of the potential for a pullback.
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This weakness also points to a pessimistic shift in the attitudes of investors after they remained largely jubilant in the market boom at the start of the year. he was there A wave of fear of losing To make big profits on everything from GameStop to cryptocurrency while bouncing.
In September, the Dow Jones Super Average fell 4.3 percent, its biggest loss since October 2020.
Meanwhile, the S&P 500 fell 4.8% in September, its first monthly decline since January and the largest since March 2020, when the COVID-19 pandemic hit financial markets and the global economy for the first time. Its September drop brought it only 0.2% in the third quarter, the smallest quarterly gain since the coronavirus outbreak began.
To be sure, stocks have posted double-digit gains for the year. The Dow and S&P 500 indexes are up 12.2% and 16%, respectively, so far in 2021.
Why shouldn’t investors be afraid
The economy is recovering after last year’s slump and corporate profits are growing again. Despite the challenges with COVID-19, investors are feeling more hopeful about the long-term.
The US economy could benefit from another spending boom as businesses reopen, buoyed by declining coronavirus fears, steady household incomes and larger savings accounts. As the economy recovers and more Americans get vaccinated, the current bull market has more room to run and could add to the value of Americans’ 401(k) plans, experts say.
Since World War II, economic expansions have lasted, on average, for more than five years. This indicates that the stock market could be poised to continue rising in the final months of 2021 and beyond as the economy recovers.
“I don’t expect a recession to happen,” says Liz Young, head of investment strategy at SoFi, an online personal finance company. “This volatility could continue through the fall, but I still expect the stock market to end higher this year, and things may look more optimistic by December than they are now.”
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After the historic crash in March 2020, stocks are up nearly 100%, hitting record levels after unprecedented assistance from the Federal Reserve and Congress to support the economy during the global pandemic.
On Thursday, the S&P 500 fell more than 5% from its all-time high on September 2, the first time this has happened since September 2020. That’s a long stretch of stability. The broad index typically falls by 5% or more two to three times per year.
Analysts say this means that stocks were likely late to decline after a strong wave, which will benefit people who avoided the market during last year’s market turmoil and lost huge gains. It will also help people who want to keep piling money into retirement and investment accounts, according to Young.
“The market was due to some volatility. Pullbacks and pullbacks in the stock market without a recession usually buy opportunities,” Young added.
After Friday’s rally, the S&P 500 moved 4% away from its high. The Dow and Nasdaq are both down 3.7% and 5.3% from their highs.
Market dips provide an opportunity to snatch bargains
Stocks started a new quarter on Friday. The fourth quarter is usually the best for stocks, rising 3.8% on average over the last three months of the year, according to LPL Financial. The data showed that in the past seven times, the S&P 500 has risen by 15% since the beginning of this period, and the last quarter of the year has been higher each time, up 5.8%.
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So, although October is notorious for its turmoil, investors may want to ramp up their retirement savings and use any potential market dips as an opportunity to collect stocks in case there are any concerns in October that drive stock prices down, financial experts say.
“October often creates fear on Wall Street,” Jeff Hirsch, Stock Trader’s Almanac editor, said in a note to clients. But he added that “in the event of a significant decline in October, it would likely be an excellent buying opportunity.”
This article originally appeared on USA TODAY: The stock market is preparing for October fainting? Investors should not be afraid