After the Worst October in Five Years, the Stock Market Can Still End 2023 on a High Note, if This Historical Trend Continues

In October, U.S. stocks concluded with their poorest performance in five years, marking the third consecutive month of losses, which is the longest such streak since March 2020.

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Despite this, some individuals on Wall Street are maintaining optimism for a turnaround during the final months of 2023, even as high Treasury yields and the Israel-Hamas conflict continue to undermine the demand for riskier assets like stocks.

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The basis for this optimism is partially rooted in a well-established historical pattern indicating that stocks tend to exhibit their most robust performance of the year in the last three months.

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"Amidst widespread pessimism, along with positive technical trends in the U.S. and favorable seasonal patterns soon taking effect, we continue to believe that it's premature to give up on the stock bull market," remarked Chris Konstantinos, Chief Investment Officer at Riverfront Investment Group, in communications shared with clients.

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While past performance can't guarantee future results, data from Dow Jones Market reveals that the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average typically outperform during the final quarter of the year, based on an analysis of average annual performance.

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Over time, this phenomenon has given rise to the investing adage "sell in May and go away," where investors divest from stocks during the summer months, only to return in September or October to benefit from the year-end rally.

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Moreover, the case for a November and December stock upswing becomes more compelling when the S&P 500 has experienced declines in August, September, and October, as it did this year. Before 2023, this had only occurred five times dating back to 1950: 1952, 1957, 1977, 1990, and 2016.

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During each of these years, the index rebounded in November. With the exception of 1957, it continued to rise in December, according to an analysis of FactSet data conducted by Ryan Detrick of Carson Group.

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Stocks are already displaying signs that they may have reached a bottom. After entering correction territory on Friday for the first time since December, the S&P 500 has regained some ground. It is currently down only 8.6% over the past three months.

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While this decline has been challenging, Detrick pointed out that the S&P 500 typically experiences a 14.3% pullback from its peak to trough during an average calendar year. In his opinion, this lends further credibility to the idea that stocks are once again on an upward trajectory. And he is not alone in this view.

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"After the kind of pullback we've witnessed, November is expected to be the best month, according to seasonal patterns," stated John Stoltzfus, Chief Market Strategist at Oppenheimer. "A 4% to 6% rally would not seem unreasonable to us," he added in a conversation with MarketWatch.

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Stoltzfus recently revised his year-end target for the S&P 500 to 4,400. In comparison, the S&P 500 concluded October at 4,193.80, according to Tradealgo data.

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It's worth noting that supporters of this optimistic outlook can cite several other indicators to bolster their case. For instance, widely monitored indicators like the relative strength index and popular sentiment surveys, such as the American Association of Individual Investors sentiment survey, offer support.

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The AAII's latest findings indicate that investors have not displayed this level of bearish sentiment since May. Rapid shifts in sentiment often indicate that investors may have become excessively pessimistic or optimistic, potentially signaling an impending reversal.

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Bank of America's Bull & Bear Survey, another widely followed sentiment indicator, recently dropped to 1.5, indicating "extreme bearishness." This represents the survey's lowest reading since November 2022.

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Furthermore, the relative strength index (RSI) for the S&P 500 dipped below 30 last week, entering what technical indicators classify as "oversold" territory, according to Sam Stovall, Chief Investment Strategist at CFRA, among others.

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Even if the market downturn persists, stocks would likely not need to decline significantly further to find support. According to a team of strategists at Bank of America, demand is likely to reemerge near the 4,050 level, as it roughly represents a 50% retracement of the gains that followed the index's lowest point on October 12, 2022.

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On the final trading day of October, U.S. stocks concluded on a positive note. However, they still registered substantial losses for the month, with the S&P 500 declining by 2.2%, the Nasdaq Composite falling by 2.8%, and the Dow Jones Industrial Average posting a 1.4% decrease.

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