Originally posted at Briefing.com
Can you kill a bear that was never a cub? We may find out soon enough if the month of October, which has a reputation for being a "bear killer," keeps going the way it has started.
October Not So Scary
Understandably, many people think of October as being a scary month for the stock market. That's because it had the honor of being the month in which the stock market crashes of 1929 and 1987 occurred, and the month when other big drops took place (we're talking about you 1997 and 2008).
At the same time, those rough historical experiences lead one naturally to conclude that October is the worst month for the stock market. That isn't the case, however.
The worst month for the stock market is September, which has produced an average decline of 0.5% for the S&P 500 since 1950, according to the Stock Trader's Almanac. September 2015 won't help that average considering the S&P 500 declined 2.6% for the month.
October for its part is not nearly as bad as many people think. In fact, it ranks as the seventh best-performing month for the S&P 500 since 1950 with an average gain of 0.8%. Sure, there are a few (very) bad years here and there, which holds true for every month, but by and large October is a month that often sees the market's value go up as the leaves come down.
October has even developed a reputation for being a "bear killer." That reputation, according to the Stock Trader's Almanac, stems from the fact that 12 post-World War II bear markets, spanning from 1946 to 2011, have effectively met their demise in the month of October.
Go Cubs Go
October 2015 so far is looking pretty good for the S&P 500. As of this writing, the S&P 500 is up 5.4% for the month.
That performance doesn't make this October a "bear killer," largely because the S&P 500 hasn't been in a bear market, which is defined as a market that has fallen at least 20% from its high.
At its low on August 24, the S&P 500 was down 12.5% from its high. That pullback not only defies the definition of a bear market, it makes it a stretch even to call the retreat a "cub market."
The widely-accepted view is that the S&P 500 suffered a "correction," which is defined as a pullback of 10% or more from a high.
That was actually the first correction for the S&P 500 in four years, which is extraordinary considering there is usually about one correction each year on average. In that light, it almost goes without saying that the S&P 500 was overdue for a correction.
The latter point notwithstanding, one could easily be inclined to think right now that we're in a bear market, particularly if they are aware that 282 stocks in the S&P 500 have dropped at least 20% from their all-time high.
That's right. More than 50% of the S&P 500 is in a bear market, and yet the S&P 500 overall is down only 5.2% from its all-time high, meaning it's no longer even in a correction.
In short, there is a minority of weighty stocks in the market capitalization-weighted S&P 500 that are holding off Momma Bear while a whole lot of cubs (i.e. the stocks down at least 20%) are roaming around in the wilderness.
The question everyone is wondering right now is this: will the 282 cubs trading down 20% or more from their high be getting some more siblings or will they just grow up and join the 223* stocks not in a bear market?
‘Tis the Season
One thing the market has going for it is that it is coming upon a period which has a remarkable track record of success. The period from November through April is a six-month period that has been long on returns most years versus the May through October period, which has been short on returns.
Here again the Stock Trader's Almanac lights up this tremendous differentiation.
What it shows is that the November-April period has produced 17432.70 Dow points in the 64 years from 1950 through 2013 while the May-October period has lost 1066.19 Dow points. For the S&P 500, the returns are almost as stunning. The S&P 500 has gained 1790.37 points from November-April and only 75.51 points from May-October.
It would be remiss not to add that the November-April period isn't always an up period. There have been only three instances since 1950, though, in which the Dow has suffered a double-digit percentage loss, the most recent of which was 2008 (-12.4%). Altogether, the November-April period has produced gains in 50 of the 64 years from 1950 to 2013.
That's a pretty impressive track record and it is an understanding perhaps that has helped fuel the early rally this October. The big driver of course has been the renewed belief in the idea that the Federal Reserve won't be raising the target range for the fed funds rate before the end of the year and the notion that other central banks may actually provide more stimulus before the end of the year.
The move certainly can't be attributed to optimism over a strengthening economy since the bulk of the data-based evidence of late has pointed to a slowdown in the global economy. Many market participants, however, continue to have an abiding faith in the Fed put and are having some trading fun as a result of it, cheering bad economic news because that means good central bank news to support the equity market.
Alas, the bull market is still a bull market by definition, yet some developments are afoot on the economic and earnings front that need to be corrected in a positive way to keep the cubs from spontaneously reproducing and turning into Momma Bear.
What It All Means
This isn't the fittest of bull markets right now, largely because it got fat on a diet of easy monetary policy and then became a bit of a sloth. Now, the market seems to be itching to go back on that diet, which will only make it fat again and the subsequent weight loss efforts all the more taxing.
Winter is approaching and that's when bears hibernate. In that vein, the equity market has seasonality on its side right now, but with global growth decelerating and earnings growth declining at this time, it creates some doubts about the bears' capacity to go into hibernation from November to April.
The first half of October has been terrific for the equity market, partly because the latter half of September was horrific. That was the case because the threat of the Fed raising rates too soon was a scary thought for a lot of people. Accordingly, October has held true to its usual historical form and has been a less scary month as the threat of an imminent rate hike has been repelled by a battery of weak economic data.
The latter half of October has potential to turn scary if the corporate guidance coming out of the third quarter earnings reporting period is disappointing and/or Congress takes us to the brink of raising the debt limit.
It would be really scary if a debt limit increase doesn't happen and the US starts defaulting on its obligations. Treasury Secretary Lew has said the Treasury will run out of extraordinary funding measures on November 3.
How fitting is it that November 3 is the first Tuesday in November (i.e. Election Day), which won't be nearly as important this year as it will be in 2016?
We digress. The point is that there is a risk that politics soon becomes the third rail of disappointment along with the economy and earnings. And the Fed doesn't have a tool to fix the US defaulting on its obligations, never mind that some doubt it has the tools to fix the real economy even if the debt ceiling doesn't spring a leak.
A debt default shouldn't happen and it probably won't happen, yet it is the type of event that can take a bull market and turn it into a bear market in a hurry.
Will this October kill the bears? Some have died off in the first half of the month, yet we suspect plenty are still roaming around. Their willingness to attack will depend on the shape of things to come with politics, the economy, and earnings.
None of those items is in tip-top shape right now, so it may prove harder than the first half of October has implied to kill a lurking bear which by definition has never been a cub.
*The S&P 500 is actually comprised of 505 stocks