Why the Stock Market Should Brace for More Panic in October 2020

Investors and traders alike always seem to be interested to see if patterns of the past are useful for evaluating the immediate future. It may sound odd to think that the calendar alone matters, but real money trades based on many trends, and some older investors tend to have longer memories than new investors. October is one of the months on the calendar when the stock market is frequently on the defensive. History has shown that big stock market sell-offs, and even crashes, are not outside of the norm. To add in a twist for October of 2020, this is a presidential election year to boot.

While it is easy to look for historical patterns, the first thing always to assume is that future is not certain.

On the afternoon of the next to last trading day of September in 2020, the S&P 500 was down about 4.5% since the last trading day of August. September’s highest close was actually on September 2, and the S&P 500 was down about 6.6% from that peak.

There are lots of reasons to be cautious about the month of October, and that is certainly the case for 2020. Two of the biggest one-day crashes, in 1929 and 1987, ruined many investors. The 1929 crash was a precursor to the Great Depression of the 1930s, although the 1987 crash was followed by steady gross domestic product growth for several years.

Other more recent panics have been seen in October. Some may be coincidental, but the machines that trade billions of dollars a day might not care about the “why” in their equations.

There was a huge drop in the Dow Jones industrials at the end of October 1997, and then there was a large drop again in 2008 that helped to kick the Great Recession into full speed after a loss of about 18% in a week.

The good news for October of 2020 is that it already saw a sell-off in September. Another potential positive is that March of 2020 saw the worst performance from the start of the month to the lows. The bad side of the equation, regardless of which month the calendar shows, is that the S&P 500 and Nasdaq both recovered all their losses from February and March and that it has been only one month prior to this article that the indexes already had hit new all-time highs again.

More recently, October 2018 brought on sharp selling pressure that lasted almost through year-end. That selling proved to be overdone (and perhaps extremely misguided) because the market went on to keep hitting new all-time highs. Those new highs lasted all through 2019, and the gains in 2020 only ended because the COVID-19 pandemic delivered such a harsh blow.

The economy and the nation seem to be approaching a crossroads at the end of September in 2020. At this time, the first debate between President Donald Trump and former Vice President Joe Biden has not been seen. The number of COVID-19 cases has continued to see new cases as economies reopen, and there is already a wide expectation that the outcomes of the presidential election and perhaps the congressional elections will be not known on election night and are likely to be contested. Then there is the issue of how the Supreme Court nomination will play out in October.

An economic recovery is also playing a role in the uncertainty for October in 2020. Even though consumer confidence surged in September, much of the other live economic reporting from August and September showed a slowing recovery. Congress also still was not in an agreement about how much more stimulus is needed, and some do not even want more stimulus.

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