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Yes, Virginia, a Strong October Typically Tempers the Santa Claus Rally

The S&P 500 gained 8.1% month-to-date through October 23, or about eight times the amount recorded in a typical October since 1945. Yet history shows that a gain in excess of 7% resulted in an advance of 1.9% in the final two months of the year, versus an average of 3.0% for all 70 years.

Also, following strong Octobers, the frequency of a price rise fell to 60% from the normal 77%. In other words, a strong October did tend to suppress the surge associated with a Santa Claus rally. Indeed, each minimum increase in the price rise for October reduced the average rest-of-year (RoY) price gain and frequency of advance, with the worst reading seen after a 7% gain in October.

S&P 500 Final Two-Month-Returns

What’s more, the best RoY results came after an October decline. In other words, Santa found that a lump of coal in his trick-or-treat bag increased the odds of a pleasant surprise in his holiday stocking.

What happens to the market also tends to happen to its sectors. Since 1990, which is as far back as S&P DJ Indices has sector data, whenever the S&P 500 was higher in October, the three top-performing sectors in October lagged the market during the rest of the year. And as the S&P 500’s October minimum results increased, the sectors’ RoY returns continued to underperform the market, while their batting averages became progressively worse.

So there you have it. The S&P 500 has done very well this October. Yet history warns us that while the market will likely continue to climb through the rest of the year, it should do so at a weaker-than-normal pace.

Finally, the three best-performing sectors in October (energy, materials & tech) as a group will likely underperform the overall market during the remainder of the year. As a result, much like the muting of this season’s foliage hues due to a lack of rain, so too will the energy behind an end-of-year rally likely be drained by a premature celebration.

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