Historically, when the stock market drops more than 1% on the first trading session of October, a rally emerges throughout the rest of the month and the rest of the year.
That is according to historical data examined by Bespoke.
On Tuesday, Oct. 1, the S&P 500 (^GSPC) ended the trading session near session lows, closing down 1.2% to 2,940.25. It was the worst day for the market in weeks.
The decline was sparked in part by a weak reading from the Institute for Supply Management’s manufacturing purchasing managers’ index (PMI), which stood at 47.8 in September, the lowest reading since 2009. Any level below 50 indicates a contracting manufacturing sector. The lackluster reading fanned fears of a recession, which have been heating up in recent months, especially with the inversion of the yield curve in August. That has historically preceded past recessions.
The most recent Oct. 1 decline of more than 1% was back in 2014, when the S&P 500 fell 1.3%. It then gained 3.7% for the rest of the month and 5.8% for the rest of the year, according to data examined by Bespoke.
In fact, for all of the declines that exceeded 1% on the first trading session of October, the average S&P 500 gain for the rest of the month was 3.75% and 7.22% for the rest of the year, according to Bespoke.
Volatile Months For Stocks
Historically, October and September are volatile months for stocks. Yet, Sept. 2019 was quite calm.
“What has us worried this October is the fact that September this year was historically calm. If we know one thing, it is that markets don’t stay calm forever, and after a dull market last month, we could be due for some usual October volatility,” wrote LPL Financial senior market strategist Ryan Detrick in a note to clients. “The S&P 500 in September 2019 didn’t have a single 1% drop and only two 1% gains. This normally volatile month could be passing some big moves to October this year.”
For the past 18 months, the stock market has been worried about the continuing trade war between the U.S. and China. The market has become sensitive to trade headlines during this time. Adding fuel to expectations of an already volatile October trading month are media reports that trade negotiations between the U.S. and China are set to resume on Oct. 10.
“Markets will be looking for positive commentary from both sides going into this meeting and tangible steps to an agreement immediately after,” wrote DataTrek Research co-founder Nick Colas in a note.