October could serve as a “bear market killer” for the US stock market, said Carson Wealth in a note. Of the past 17 bear – or near bear markets – stocks have bottomed in October six times. Markets are entering another strong season: the period after a midterm election. Loading Something is loading.
US stocks have been ripping higher as the market enters the final quarter of the year, and October could serve as a “bear market killer” as it heads into another strong season: the period after midterm elections.
“[We] think there is still a good chance for stocks to rally by year-end,” said Ryan Detrick, chief market strategist at Carson Wealth, in a note published Monday.
Stocks on Tuesday logged a second consecutive rally, with the S&P 500 climbing 3.1%, aided by a drop in bond yields. The rebound comes after the S&P 500 fell 5.3% in the third quarter and tumbled 9.3% in September.
“While October has a reputation for crashes, it is really a bear market killer. Of the past 17 bear (or near bear markets), stocks bottomed in October six times. Could it happen again? With sentiment this pessimistic and extremely positive seasonals right around the corner, we’d be open to it,” he wrote.
Among his findings tracking back to World War II, the S&P 500 exited a bear market in October 2011 after accumulating a loss of 19.4% over five months. October 2002 ended a bear market that lasted for more than 30 months, and the market was a winner in October 1990 after nearly three months of declines.
A contrarian indicator also signaled a possible market bottom that might clear the way for a rally. The American Association of Individual Investors Sentiment Survey released in late September showed bearish sentiment at 60.8%. Expectations that stock prices will fall over the next six months were above 60% for a second consecutive week – an unprecedented occurrence, said Detrick.
“From a contrarian point of view, expectations are quite low, which could spark a rally on any good news (or maybe even less bad news). Of course, this doesn’t mean stocks will bottom immediately, but we are getting close.”
A win for stocks in October could set up gains for November, which this year features the US midterm elections. In the Senate, 35 of 100 seats will be contested, and all 435 seats in the House of Representatives are up for votes. Democrats are fighting to hold slim majorities in both chambers.
The year after a midterm election is one of the strongest periods for investors, said Detrick.
“Markets hate uncertainty, and there is a lot of that heading into an election. But once the election is over, stocks have historically done extremely well,” he said, adding that since World War II they’ve never been lower a year later and have risen an average of 14.1%.
“It might not feel like it now, but there could be good opportunities for investors over the coming year, and history would say be open to potential strength,” Detrick wrote.