Data Board | Will US Stock Market Crash or Bottom in October?

In history, it's quite a coincidence that two major stock market crashes in the U.S. occurred in October.

In October 1929, the Great Depression began to spread, leading to a massive stock market crash.

In October 1987, the U.S. experienced Black Monday, with the Dow Jones Industrial Average plunging by over 20% in a single day.

With the conflict in the Israeli-Palestinian region, the U.S. dollar is surging. On one hand, there is the significantly better-than-expected non-farm employment data, and on the other hand, the Federal Reserve's unwavering commitment to its inflation target, leaving many investors feeling "chilled to the bone" about this October.

1. Is October really the month of stock market crashes in the U.S.?

The following chart provides the average returns and daily average volatility of the $S&P 500(.SPX)$ for each month over the past 50+ years (1970-2022).

It can be seen that October does indeed have the highest average volatility, significantly exceeding all other months.

However, the average returns for October are not low, averaging over 1%, which is quite substantial. It can be seen that October does indeed have the highest average volatility, significantly exceeding all other months.

Source: Bloomberg

2. The decline in the second half often comes to a halt in October

October experiences the highest daily average volatility, and coupled with the two well-publicized October crashes in the past, it has instilled fear in many investors.

So, we further analyzed the occurrence of over 10% drawdowns in the second half of the year in the $S&P 500(.SPX)$ and found that the probability of the lowest point falling in October is close to 40%, significantly higher than in other months (with July having a 0% probability of the lowest point).

In other words, if there is a greater than 10% decline in the second half of the year, the highest probability for it to bottom out is in October!

Source: Bloomberg

3. Historical performance of the U.S. stock market in Q4

The statistical results show that historically, October to December, especially the fourth quarter, usually has good returns and rarely goes down.

Further dissecting the annual returns of the S&P 500, it can be observed that the median and mean total returns in Q4 are 6.64% and 4.58%, respectively.

The probability of making money is also close to 80%, which is significantly higher than the other three quarters. So, based on historical data, it appears that in Q4, opportunities outweigh risks.

Source: Bloomberg

4. How do the performances of the first three quarters impact Q4?

Some analysts in the market believe that the total returns in the first three quarters of the year are significantly positively correlated with the performance of the S&P 500 in Q4.

In light of this, we conducted a statistical analysis spanning over 50 years, plotting the relationship between the total returns of the S&P 500 index in Q1-Q3 and the total returns in Q4.

The results indicate that when the total returns in the first three quarters are positive, the average returns in Q4 increase from 4.58% to 5.13%, and the win rate also rises from 79.25% to 82.5%.

Source: Bloomberg

Let's break it down further, considering two variables: the performance of the first half of the year (H1) and the performance in the third quarter (Q3), to observe the situation of the S&P 500 in the fourth quarter (Q4).

In simple terms, it can be divided into four scenarios, H1 up, Q3 up; H1 up, Q3 down; H1 down, Q3 up; H1 down, Q3 down.

We have analyzed data from over 50 years, and the probabilities and average gains for each of these scenarios in Q4 are shown in the following chart. Interestingly, when H1 is up and Q3 is down, the probability of Q4 rising is actually 100%! Even more interestingly, this is precisely the situation this year.

5. Summary

While the memory of the 'October crashes' still lingers in the stock market, they were just two unfortunate coincidences.

Through objective data analysis, we have found that October does indeed witness increased stock market volatility. It's also more likely to hit the lowest point after a big fall in the second half of the year. However, the probability and extent of the subsequent rise are also greater.

Of course, when historical statistics are combined with market fundamentals, a thorough analysis of risks and opportunities can lead to more efficient investment decisions. Taking each step carefully may enhance investment efficiency.