October: The Month Where Bears Markets Go to Die
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
Fall bear-hunting season runs through October, and equities investors
burned in the six-month selloff may be happy to know that October is also
a popular time to kill off bear markets.
A third of postwar bear-market bottoms occurred during the month of
October (and half of them, in the fourth quarter), after which time
investors began to rebuild decimated markets. Strategists say they can't
pinpoint exactly why October is a popular month to usher bear markets
out the door, though a number of seasonal and psychological factors
contribute to the phenomenon.
For starters, optimism tends to build as the year comes to a close and
investors begin to look ahead, especially when they're anticipating things
will get better in the following year.
"When you get into this period, most people are writing off this year and looking forward to next year. The grass always looks
greener from here," says James Luke, a portfolio manager at BB&T Asset Management in Raleigh, N.C.
As investors look at 2003, bulls anticipate the economy will be getting stronger. That should give lackluster corporate profits a
boost and, therefore, push stock prices higher. Also, as 2003 comes into focus, there's a sense that the market has suffered
enough, bringing valuations back to reality.
Barring an astounding comeback, major averages will suffer their first three-year
losing streak since 1939-1941. While the possibility of a fourth down year exists, of
course, most find it hard to fathom -- it's only happened one other time, between
1929 and 1932. As historians among you will recall, that was after the crash of '29
and during the opening years of the Great Depression. It should be noted, however,
that many Wall Street pundits found the idea of a third down year preposterous as
well.
Bulls feel the market is overdue due for a snapback from a selloff that has left stock indexes nearly as bloodied as they were in
the bear market of 1973-1974, when the S&P 500-stock index tumbled 48%. From its peak in March 2000, the S&P 500 equities
index is off about 48%.
Other seasonal trends are -- finally -- on the market's side. The six months from November through April are historically the
best-performing months on Wall Street, an trend first documented by market historian Yale Hirsch.
Meanwhile, investors have said "so long" to a horrible September -- the worst September since 1937 for the Dow Jones Industrial
Average. October's frequently a stinker as well, but a little bit more selling would be worth it if it means hearing the first death
rattles of a bear that's gobbled up so much of America's retirement savings.
As Bad as It Gets
Another so-bad-it's-good feature of October is that many times, analysts hit the nadir of pessimism right about now. Wall Street
struts into the New Year jaunty as a 20-year-old dot-com millionaire, only to spend the rest of the year scrambling to ratchet
down their projections for stocks and indexes and earnings.
By the beginning of the fourth quarter, cockiness has been wrung out of the Street and expectations are crushed. This year,
analysts at the start of the second quarter expected S&P 500 fourth-quarter earnings growth of 41.5%; by the end of the third
quarter, they had cut their hopes for growth all the way down to 20.6%, according to First Call.
"Corporate managements start giving realistic, pessimistic expectations for the [current year]. It tends to cause a selloff, the panic
type of thing that occurs in September and early October. [After that], you have the Christmas shopping season and people are
looking ahead to next year," says Don Hays, president of Hays Advisory Service in Nashville, Tenn.
On the earnings-reporting front, things may well improve as the month wears on as well.
While September suffered from on onslaught of companies warning they'd fall short of expectations for quarterly earnings, when
the actual reports come out later this month, Wall Street may get something that's been in short supply as of late -- a nice
surprise.
"The reports we see on earnings for the third quarter will be, on balance, more companies reporting pleasant surprises than
disappointments. All the bad news is out of the way," says Hugh Johnson, chief investment officer at First Albany.
There was certainly plenty of bad news to go around. As of late Wednesday, 543 companies had issued warnings that they'd
miss third-quarter targets; of that number, 231 said their results would come in ahead of predictions, according to First Call.
Meanwhile, investors may be willing to get back into stocks simply because popular alternative investments don't look very
appealing.
"Yields are so low that there are probably hundreds of stocks that have a better dividend yield than the five-year Treasury," Mr.
Luke says. Yields on Treasury bonds are at their lowest point in more than 40 years.
Another plus for the fourth quarter could be a rate cut by the Federal Reserve, inspiring more confidence in future economic
performance, and therefore in the stock market. A dithering economy has led investors to believe the central bank will step up to
the plate -- the November Fed-fund futures were leaning toward a 25-basis point cut by the Nov. 6 meeting.
"It's beginning to look like the Fed will cut interest rates again. You'll have huge refinancings out there, which are typically
followed by improved sales" as monthly mortgage payments are lowered and consumers take that money to the mall, says Mr.
Hays.
A number of unknowns -- namely, uncertainties about Iraq, the West Coast dock strike and a possible double-dip recession --
could throw a wrench into the October bottoming trend and mean more selling even after all the candy bars have disappeared
from the Halloween bucket.
In spite of those caveats, some say it's time for the bear to meet its maker.
"We've been down two and a half years, in a serious downtrend, and we wiped out a lot of wealth," Mr. Luke says. "I believe the
market is getting fired up to begin to rebuild." |
