October is historically a great month for stocks

October is one of the best months of the year for stock performance, with both the S&P 500 and Nasdaq 100 indices moving higher by an average of 1.4% and 2.2%, respectively.

The major indices dropped in September, which is historically one of the worst months of the year for the stock market.

Investors will welcome a reprieve from the selling if October does bring the rally it often does. Since the first day of September, the S&P 500 index is down more than 5%.

Over the last 20 years, the S&P 500 has moved higher in October 65% of the time (13 out of 20 years), for an average gain of 1.4%. The last decade has been better, moving higher 70% of the time with an average gain of 2.4%.

The tech-heavy Nasdaq 100 index has moved higher 65% of the time in October, for an average gain of 2.2%. The last decade is slightly better, moving higher in seven of those 10 years (70%) for an average gain of 2.7%.

November is also one of the strongest months of the year for the stock market.

The study of how assets perform at different times of the year is called “seasonality.”

Cory Mitchell, an analyst with trading education website Trading.biz said, “While there are no guarantees the seasonal averages will play out this year, historically late September is a good time to ‘buy the dip’ in quality stocks to benefit from the October and November rally (December is also a decent month historically).”

The following chart from StockCharts shows how the S&P 500 has performed in each month of the year from 2003-2022. The number at the top of the column is the percentage of time the month had a positive return. The number at the bottom of the column is the average return as a percent.

Investors can take advantage of seasonal tendencies by buying shares during pullbacks in quality companies. Since most stocks are highly correlated to movement in the indices, and the indices have been pulling back in September, it may present a good time to purchase quality investments at a discount.

Quality stocks include ones that are profitable for at least five years in a row, have been steadily growing earnings over the last five years, are expected to keep growing earnings over the next five years (based on analyst estimates), have increasing yearly revenue, and tend to buy back shares instead of issuing more shares.