What goes down also goes up.
The market has been a pretty lousy place to be recently. And the general consensus seems to be that will continue.
Most of the market seers who are spouting doom and gloom seem to be freaked out about two things. One, October is often a month of market calamity. Since 1871, more than a quarter of the stock market drops that exceeded 10% have taken place in October.
Second, this year seems eerily similar to 2011. That year, stocks started to tumble in the summer, mostly on worries of economic problems abroad, that time in Europe. The CBOE Volatility Index, or VIX, rose above 40, as it did this year in August. And stocks dropped 10%, starting in late October and ending in late November.
But here’s the thing: while the greatest percentage of market drops have taken place in October, it’s also a month in which the market tends to rebound. According to Birinyi Associates, of the 93 market corrections (drops of more than 10%) we have experienced since 1927, nearly 24% of them have ended and entered a rebound in October.
October has also been the kickoff month for some of the best stock market rallies. The market drop that ended in October 1990 led to a rally that sent the market up 232%, a run that lasted seven years. So, despite all the drops, October is not the worst month for stocks. That’s September.
Since 1927, the average length of a stock market correction has been 93 days. The current stock market drop has lasted 133 days. Stocks hit their lowest point on August 25, which was 96 days since they started dropping on May 21. So, we are overdue for a rebound.
“As painful as it is and different as it seems, the current correction is kind of average,” says Jeff Rubin, director of research at Birinyi Associates.
Now, we shouldn’t ignore the many issues that investors should be worried about. After a number of years of extraordinary growth, corporate profits have been weak. Analysts estimate that earnings at the average company in the S&P 500 fell 4.5% in the third quarter. That follows a slight drop in the second quarter, making it the first time since the financial crisis that we have had two down earnings quarters in a row. Also, prices have dropped on corporate bonds, meaning that it is costing companies more to borrow. At a time of slow earnings growth, that could be a problem.
But if you are worried stocks will fall from here just because they often fall in October, don’t be. They often rebound, too.
