After October saw a month of financial turmoil, with major global indices taking a beating, long-time stock market observers were quick to delve into the tealeaves or, to be more fair, crawl through historical trends to provide some idea of what's in store for the last two months of the financial year.
"Shocktober," as Jim Reid, macro strategist at Deutsche Bank, dubbed it, saw the S&P 500 falling for a third consecutive month for the first time since the pandemic-induced slump in March 2020, while the FTSE 100, DAX, and Nasdaq were not spared either.
While the markets churn in uncertain waters, Reid points out that the seasonals are set to turn favourable – though plain sailing it is not.
"Even though I think tougher macro conditions are to come with risk likely to suffer, the seasonals turn positive from here," he said.
The strategist highlights that local lows in the S&P 500 typically occur on October 27th on average, with historical data dating back a century supporting this observation.
That date this year marked the end of a run of eight falls out of nine, with the S&P then having climbed for the past two days.
"Far too early to mark a tactical/seasonal turn, but it’s always dangerous to battle against the seasonals," Reid said.
Correction or false positive?
Historical data does back up the seasonal patterns.
November stands as the second-best month for markets, following April, according to Nigel Green at deVere Group.
Following Shocktober, November could be particularly positive as many markets are in correction territory, he said, and could point to a potential year-end rally.
Typically, a recovery takes place 96 days after the start of a correction.
With yesterday around day 90, the time is ripe, said Green, “if all this data holds up”.
In the last 72 years, there have been 34 market declines in November and 12 of those led to bear markets, according to Green.
Currently, in the background, there are many factors that those of a bearish or cautious view could easily imagine a repeat of those 12 occasions, especially with the present equation of Ukraine + Hamas + oil price + interest rates + unprecedented debt levels + increasing environmental disasters + ongoing US-China tensions + so on.
Some cautious optimism
Indeed, while seasonality suggests an upturn, analyst Rob Saunders at Shore Capital is among those who cautions against excessive optimism.
However, Saunders is sanguine about the prospects of consumer spending during the holiday season and is reassured by takeover activity, especially in UK mid and small caps.
"The large number of takeover bids is an indicator of the relative value of UK equities," he stated.
The UK market, according to Saunders, remains attractive in a medium-term view, particularly with the government’s confidence in halving inflation to 5.3% in 2023.
As for interest rates, the market seems fairly confident they have peaked, and equities could be a better hedge against inflation.
Saunders’ advice for investors? "The key question for central banks is when to stop tightening as, historically, it has been more damaging in the longer-term to stop too early than do too much."
Forward-looking statements
So, as leaves fall from the trees and investors wonder if their portfolios will do the same, the combined wisdom might seems to suggest that it might just be the season to be jolly.
But Saunders warns, there’s always a time lag in when businesses and consumers feel the impact of rate hikes.
And as we move into a definite US election year and with a UK general election also possible, the dynamics could change dramatically, making it crucial for investors to tread carefully.
The strong performance by the Nikkei over the last 12 months or so is a case in point to encourage investors in the UK, for Saunders.
It has demonstrated that "there can be handsome returns when sentiment turns in favour of unloved asset classes and some cash is invested in the market rather than being taken out of it.
"UK equities and the smaller end, in particular, could hardly remain more out of favour, in our view."