Should history repeat itself, and there’s no guarantee it will, the correction in the S&P 500 either has already ended or will likely come to an end this month.
There have been 19 corrections since WWII. On average, these corrections took five months to go from peak to trough. And since this correction started in May, October conveniently pops up as a potential bottoming month. In addition, October has been the market’s favorite month in which corrections and bear markets came to an end.
Of the 31 declines of 10% or more since WWII (19 corrections and 12 bears), 32% of them ended in October, which was twice the frequency of the next highest month (March) and more than three times the third-highest month. Indeed, five of the last 10 bear markets ended in October, as did five corrections.
October bottoms for corrections and bears tend to set up the market quite nicely for a final-quarter surge. In the 10 fourth quarters following the five bear markets and five corrections that ended in October, the S&P 500 gained an average of 6.4% and rose in price 90% of the time, falling only once (1957), since the market’s bottom was so deep and late in October.
Take the correction of 2011 for example. The S&P 500 peaked on April 29 and bottomed on October 3, declining a total of 19.4% over a five-month period. Year to date through October 3, 2011, the market was off 12.6%. In Q4 2011, however, the “500” surged 16.8%, allowing the S&P 500 to close the year essentially where it started.
Following a possible Santa Claus rally in 2015, history says that the S&P 500 would then be on track reach breakeven sometime in February, 2016, since the average correction took four months to recover all that it lost in the prior decline.
The old saying that a rising tide lifts all boats applies to S&P 500 sector performances in the fourth quarter as well. Since 1990, the S&P 500 gained an average of 4.9% and rose in price 80% of the time.
In addition, all 10 of its sectors advanced in price from more than 6% for Consumer Discretionary, Consumer Staples and Technology, to less than 4.5% for Energy, Financials, and Utilities. From a batting average perspective, five sectors gained in price at least 80% of the time, while none rose less than 64% of the time.
Drilling a little bit deeper we find that 15 sub-industries in the S&P 500 have three Q4 characteristics in common: 1) They have been in existence for at least 20 years, 2) they recorded an average Q4 price increase exceeding the S&P 500’s, and 3) they rose in price at least 75% of the time. In addition, each has an aggregate S&P Capital IQ STARS of at least 4.0 (Buy).