Black September for US stock markets, what will happen in October?

September was a month that most investors would like to forget, with the S&P 500 down 9.34%, the NASDAQ 100 declining by 10.6%, and the Russell 2000 falling by 9.73%. Global investors were not spared, either, with the FTSE 100 down 5.23%, the Euro Stoxx 50 index losing 5.24%, and the Nikkei falling 6.99%. Even investors in “safe” U.S. 10-year Treasuries experienced a price decline of over 5%, and the Bloomberg Commodity index lost 8.35%. Without exaggeration, there was no place for investors to hide this September except in the safety of cash (historically a terrible long-term investment, especially during periods of high inflation). The poor equity returns were especially painful, marking the third consecutive negative quarterly return for the S&P 500 (last seen in 2008-2009, when the S&P 500 fell for six consecutive quarters, erasing ~48% of its value).

What should U.S. stock market investors expect for October and beyond? The historical record may provide some degree of comfort. According to data from the Stock Trader’s Almanac, since World War II twelve bear markets have ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and—for all practical purposes—2011. (At one point in 2011 the S&P 500 had declined 19.4%, just shy of the technical definition of a bear market.)

Even more encouraging, seven of these years coincided with a midterm election (as 2022 does, with congressional elections occurring on November 8). As Jeff Hirsch of the Stock Trader’s Almanac notes, “The fourth quarter of the midterm years combines with the first and second quarters of the pre[presidential]-election years for the best three consecutive quarter span for the market, averaging 19.3% for the DJIA and 20% for the S&P 500 (since 1949), and an amazing 29.3% for the NASDAQ (since 1971).”

While we would not be surprised to see an October bounce (and perhaps a 4th-quarter rally), as the U.S. equity market does seem majorly oversold at present, investors should temper their expectations in the face of many near-term headwinds, such as the war in Ukraine, a hawkish Federal Reserve, continued supply chain concerns, and still-high inflation. We also note that two of the biggest declines in U.S. stock market history (1929 and 1987) occurred in October.

In addition, at ~15.1x earnings (fwd.), the S&P 500 is not particularly cheap by historical standards, although the S&P 500 equal-weighted index is selling at similar valuation levels to those seen during March 2020, when the world was in the midst of COVID-19 lockdowns and the stock market was in freefall. Many of the companies in the Mapfre US Forgotten Value Fund are not mega-capitalization names, so we see the S&P 500 equal-weighted index (currently selling at ~13.4x earnings [fwd.]) as offering a more apt valuation comparison than the traditional S&P 500, which weights the largest companies far more heavily.

Patient long-term stock market investors should not be disheartened by the September stock market swoon, nor should they be overly discouraged by potentially weak October results. As counterintuitive as the idea might feel at the moment, bear markets are our friends, because they create opportunities for us to purchase businesses at bargain basement prices. Without months like this past September, we wouldn’t be able to set ourselves up for potential future outsized gains—which is exactly what the Mapfre Forgotten US Value Fund has been doing during the current selloff.