Recent weeks have seen U.S. stock markets grapple with significant declines, reinforcing the notion that September is a notoriously difficult month for equities. The S&P 500 Index ($SPX) has slipped by approximately 4% this September, while the tech-focused Nasdaq Composite ($NASX) has experienced a nearly 5% downturn. As we approach the end of the third quarter, it’s becoming apparent that these leading equity market indices are heading towards their most challenging month of the year, marking two consecutive months of losses.

Now, the looming question is whether the infamous “October Effect” will add to market volatility. October has a historical reputation for being associated with a higher occurrence of market crashes. Although historical data from Yardeni Research indicates that the Dow Jones Industrial Average ($DOWI) has, on average, gained 0.6% in October between 1928 and 2022, it’s essential to consider that seven out of the ten worst Dow Jones crashes happened in October.

Historical Market Crashes in October:

Some of the most iconic market crashes, including the 1907 panic, the 1929 crash, and the notorious Black Monday of 1987 (when the Dow plummeted by over 22% in a single day), all unfolded in the month of October.

The 2008 Great Financial Crisis witnessed a substantial global and U.S. stock market collapse during October.

In more recent history, U.S. stocks experienced a significant downturn in October 2018, driven by then-President Donald Trump’s trade tensions and the Federal Reserve’s interest rate hikes.

It’s crucial to emphasize that while these historical events may suggest a pattern, there’s no concrete analytical basis for these effects. For example, U.S. stocks closed positively in May this year, despite the traditional “May effect.”

Key Factors to Monitor in the U.S. Stock Market in October:

1. Economic Data, Particularly Inflation: Recent economic data, including the September consumer confidence index, has raised concerns about a potential recession. Investors should closely watch U.S. economic indicators, especially those related to inflation and the job market, as they will influence the Federal Reserve’s interest rate decisions.
2. China’s Economic Slowdown: The ongoing economic deceleration in China is a significant concern. Given that China is a crucial market for several U.S. companies, including Apple (AAPL) and Nike (NKE), investors should pay close attention to economic data from the world’s second-largest economy.
3. Bond Yields: The U.S. 10-year bond yield recently reached a 15-year high of 4.65%, with some experts suggesting it could approach 5%. U.S. stocks may not have fully factored in the possibility of such high yields.
4. Student Loan Repayments: October marks the resumption of student loan repayments. While this may benefit student loan refinancing companies like SoFi (SOFI), it could have a dampening effect on the overall economy.
5. Government Shutdown and Autoworkers’ Strike: The looming government shutdown and the ongoing autoworkers’ strike could pose challenges to the U.S. economy in the fourth quarter.
6. Q3 Earnings Season: The third-quarter earnings season is set to begin, with results from sectors like banks and tech expected to be critical. The tech-driven rally, fueled by AI stocks, played a significant role in the market’s first-half gains.
7. Rising Oil Prices: Investors should also keep a watchful eye on oil prices, as further surges in crude futures (CLX23) could impact not only the Federal Reserve but also global central banks. An oil-driven spike in inflation could complicate policy decisions.

Despite these uncertainties, analysts polled by FactSet are anticipating a robust 12.2% increase in S&P 500 earnings for 2024. Valuations have also returned to historical averages, with the forward 12-month price-to-earnings ratio at 18x, which is not significantly higher than the 10-year average of 17.7x.

In conclusion, October could prove to be a volatile month for the markets, given the prevailing macroeconomic environment. Corporate earnings are likely to play a pivotal role in shaping market sentiment, and if leading companies can provide a positive outlook for 2024, it may drive stock prices higher during the month.

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