As the market works through what is often the weakest month of the year, many traders’ sights are set on another far more productive seasonal pattern.

Approaching the middle of September, the S&P 500 was on track for better-than-average results for the month despite a disappointing CPI report. Investors, however, soon will be looking ahead to what often mistakenly is characterized as a treacherous trading period. The S&P 500 more often than not ends October with a gain, but the bad reputation for the month comes from the fact that in several years the market has had significantly negative results. These bad Octobers, however, eventually set the stage for major market gains.

Two of the most notably bad October results came in 1987 when the S&P 500 fell 21.76%, and in 2008 when it had a 16.94% loss. Thankfully, nothing has topped October 29, 1929, when the Dow Jones Industrial Average fell 22.6%.

The focus on October’s poor results, unfortunately, diverts attention from extremely positive fourth-quarter results in midterm election years, as the 82.35% frequency of fourth-quarter gains in midterm election years is close to the frequency of gains for the two best months of the year—November and April.

S&P 500 Results in the Fourth Quarter of Midterm Election Years'

There have been 17 midterm elections from 1954 through 2018. The S&P 500 had fourth-quarter gains in all but three of the years. The S&P 500 average for all final quarters in midterm election years is a positive 6.68%.

The 1978 loss came as the Dow Jones Industrial Average wiped out a monthly gain by falling roughly 10% in the final two weeks of October, when President Jimmy Carter’s White House was plagued by high inflation and unemployment.

A decline that began early in October sent the S&P 500 down 15.6% from the beginning of October 2018 to its intraday low December 26, 2018. The final quarter that year was the worst quarterly performance for stocks since the third quarter of 2011, as escalation in the U.S.-China trade conflict reduced monetary stimulus and global economic growth concerns weighed heavily on stocks late in the year.

The S&P 500 in September has not provided a reliable indicator of potential fourth-quarter results. The S&P 500 fell in the three Septembers when the index had a fourth-quarter loss, but it also had a loss in September in nine of the 17 post-1950 midterm years.

Sitting Presidents’ Congressional Seat Losses

The economy and the stock market suggest ignoring previous midterm election results would not be wise. For example, in 1994, President Bill Clinton’s party lost 52 seats in the House of Representatives and eight Senate seats, which some observers felt ushered in a major economic policy shift by the Clinton administration.

During the midsummer pullback that sent the S&P 500 to its most recent closing low at 3,666.77, the index carved out several potentially important support levels should the S&P backslide one more time. The most significant of these is at 3,900, in our opinion.

The market is likely to be choppy through the final three months of 2022, but it also was choppy ahead of the final quarter in many midterm election years before producing positive results for the final quarter. We suspect 2022 could end the way many midterm elections years have previously.




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