Will ‘Sweet September’ Result in ‘October Pains’?

As September 2024 comes to a close with positive momentum across major indices, investors are increasingly focusing on the historically unpredictable month of October.

While the market exhibits signs of optimism, a lingering question remains: Will the gains of “Sweet September” transition into “October Pains”?

Typically one of the weakest months of the trading year, September defied expectations in 2024. The Dow Jones Industrial Average, S&P 500, and NASDAQ all posted gains despite the common selling pressure following Labor Day. By September 25, the DJIA had risen by 0.8% for the month, while both the S&P 500 and NASDAQ showed similar positive trends, as noted in a recent newsletter from a trading publication.

This bullish trend may be attributed to the Federal Reserve’s recent 50 basis point interest rate cut, which provided a boost for stocks and enhanced investor confidence, even as some sectors, such as small-cap stocks, struggled to gain traction.

October has a reputation for volatility, often characterized by sudden drops or even crashes, especially during election years. Historical data reveals that October tends to be the weakest month for market performance during election years for the DJIA, S&P 500, and NASDAQ. The Russell 2000, which tracks small-cap stocks, also usually underperforms in October, with average losses spanning from 0.9% for the S&P 500 to 2.4% for the Russell 2000.

However, recent decades show that October is not universally negative. Over the past 21 years, it has actually ranked as the fourth-best month for the DJIA, S&P 500, and NASDAQ, and the sixth-best for the Russell 2000.

Looking ahead, the economic landscape entering October remains cautiously optimistic. Second-quarter GDP growth met expectations at 3%, while the Atlanta Fed’s GDPNow model is projecting 2.9% for the third quarter. Inflation is trending downward but still exceeds the Fed’s target of 2%. Corporate earnings have generally surpassed expectations, and employment data, while showing some softness, remains stable.

The recent rate cut by the Fed signals the beginning of a potential easing cycle, which historically tends to be favorable for markets. Nevertheless, there are concerns that aggressive cuts—greater than 2% in a year—could reflect worsening economic conditions and lead to market downturns. Some analysts caution that if the Fed continues with more aggressive cuts in the next two meetings, it could raise concerns.

From a technical standpoint, both the DJIA and S&P 500 have reached new all-time highs, but the NASDAQ has not yet followed suit, and small-cap stocks continue to lag. Market breadth indicators suggest that while many stocks are advancing, the gains are not evenly distributed, particularly with technology stocks leading the way.

One important technical signal to monitor is the Seasonal Moving Average Convergence Divergence Buy Signal, expected to activate on October 1. If the market consolidates its recent gains, a favorable buying opportunity may arise, potentially paving the way for a continuation of the rally later in the year.

As the 2024 U.S. election approaches, it looms large over the markets. Historically, market stability tends to return once the election concludes and a clear outcome emerges. However, the current political climate, with worries about a contentious election or disruptions, might contribute to increased volatility in October.