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Why the Dow won't fall victim to October-phobia

USA TODAY logo USA TODAY 10/5/2017 Adam Shell
Are October-phobia fears overblown. Traders work on the floor of the New York Stock Exchange on Oct. 3, 2017.© JUSTIN LANE, EPA-EFE Are October-phobia fears overblown. Traders work on the floor of the New York Stock Exchange on Oct. 3, 2017.

October has a sinister reputation on Wall Street. Stock market crashes in 1929 and 1987 are mostly to blame. But doomsday predictions for equities this October are conspicuously absent.

Indeed, instead of spreading a message of doom-and-gloom, portfolio managers and investment strategists interviewed by USA TODAY are calling for continued gains for U.S. stocks, and downplay the risk of a big fall in equity prices.

The basis for the bullish call boils down to two things:

First, the record-breaking stock market is being supported by improving business conditions around the globe, which bolsters the earnings power of publicly traded companies.

The second big reason for optimism is there are few present signs of traditional bull market killers, such as wildly overvalued stock prices, overly optimistic investors, rapidly rising interest rates and contracting economic growth.

"Most of these ingredients that cause market meltdowns are missing," says Peter Cardillo, chief market economist at First Standard Financial, a financial services firm headquartered on Wall Street in New York. 

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With fewer bad things in the pipeline to trip the market up, and the economy and corporate profit growth coming in at or above investor expectations, Cardillo says he doesn't expect an "October surprise."

Barring market angst caused by an unpredictable geopoltiical event, the "market is likely to move higher," he says, adding that the market can suffer short-term blips, or pullbacks, at any time. 

If Cardillo is right, investors that suffer from the Wall Street malady "October-phobia" —or the fear of a stock market crash like the Dow's 22.6% drop on Black Monday in October 1987 — might get a reprieve from their angst and find that their heightened anxiety level is misplaced.

In the first three trading days of October, the stock market has been in rally mode. The Dow Jones industrial average has closed higher each day and notched its 43rd, 44th and 45th all-time highs of the year. The blue-chip average — which is trading 65 points higher early Thursday — is up nearly 15% in 2017. The sizable gains have come despite fears of a U.S. military confrontation with North Korea, President Trump's stalled economic agenda and a market that has become pricey relative to earnings.

October's Dark Past

Thanks to tumultuous, wealth-destroying market events, October has a dark past.

The 1929 crash that caused the Great Depression happened in October. So did the 1987 crash. Stocks also suffered a short drop of nearly 10% in October 1997 in a selling panic sparked by a currency crisis in emerging markets. The last bull market also died in October 2007, setting off the worst stock market decline since the Great Depression. Stocks also cratered nearly 17% in October 2008 during the financial crisis.

All the stock market dives in years ending in "7" — 1987, 1997 and 2007 — give investors pause, Paul Schatz, president and chief investment officer of Heritage Capital, a personal investment management firm in Woodbridge, Conn., said in a research report.

"Octobers in years ending in 7 have had unique behavioral patterns to the downside," he wrote. The good news, he counters, is that most of the biggest declines have come when markets were already in decline heading into the month. Stocks, of course, have been on a tear all year long.

Reasons to be Bullish

Bad memories of short-term stock losses overshadow the fact that October' s overall performance over the years hasn't been as horrific as the highly-publicized plunges suggest, data show.

October, for example, actually marks the end of what historically has been the worst six-months for stocks and the start of the best three-month period, which is the year-end stretch from October through December.  

October has also been the Dow's second-best month in the past 20 years, posting gains of nearly 2% and finishing higher 70% of the time, according to Bespoke Investment Group. And since the end of the 2008 financial crisis, the broader Standard & Poor's 500 stock index has gained nearly 3% in October from 2009 thru 2016, versus an average gain of 0.9% for the month dating back to 1983, Bespoke data show.

Rock-tober gains in 2017?

The recent strong performance in October is seen continuing this year.

Chris Retzler, manager of the Needham Small Cap Growth fund, says despite October's "frightful reputation," he does "not expect a negative October surprise." 

Stocks will benefit from improving global growth prospects and "potential clarity" on government policies, including President Trump's recently proposed tax cut plan, says Retzler. Any pressure on stocks that results from fear of the Fed removing stimulus from the financial system will be offset, he says, by the pro-growth policies and deregulation from the Trump administration.

In the end Wall Street doesn't see the bottom falling out of the stock market because the foundation of the rally is supported by economic growth, strong earnings and low borrowing costs.

"There's just not a lot to fear in the outlook," says Chris Rupkey, chief financial economist at MUFG Union Bank. 

   

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