Have a "bad" day tomorrow (here's hoping anyway)
Key points
- 10% of all trading days have seen the S&P 500 decline by -1% or more
- Interestingly, the first trading day of October has seen such a decline 16% of the time
- Even more interestingly, historically, this has not been a bad thing for stocks
When the first trading day of October is bad…
We will define a "bad" day as a day when the S&P 500 Index declines by -1% or more. In 69 years since 1955, the first trading day of October has had a "bad" day eleven times, or 16% of the time. Will October 1st, 2024, be a "bad" day? History suggests only a 16% probability of that happening. But would it be a bad thing if it did? Here is where it gets interesting.
We start our test on 1954-12-31, using the following assumption:
- If the S&P 500 loses -1% or more on the first trading day of October, we will buy the index at the close of that day and sell at the close of the last trading day of the year
In other words, if the fourth quarter gets off to a dreadful start, we will bet on a bullish market for the remainder of the quarter. How has this worked out? Let's take a closer look.
…the rest of the fourth quarter tends to flourish
The chart below displays the hypothetical growth of $1 invested in the S&P 500 from the close of the first trading day of October through the end of December if the first trading day of October was down -1% or more.
The table below displays the price performance for the S&P 500 during the fourth quarter holding period described above, following a loss of -1% or more on the first trading day of October.
The table below summarizes S&P 500 performance during the periods highlighted in the chart above.
A closer look at sectors and factors
The table below displays period returns for the S&P 500 sectors and factors and summarizes sector and factor performance during the periods highlighted above. Real estate, technology, financials, and healthcare are the top four performers.
What the research tells us…
The probability of a "bad" day (S&P down -1% or more) tomorrow is low (10% historically looking at all trading days, though 16% for the first day of October. Likewise, there is no guarantee that even if the S&P declines by -1% or more tomorrow, the stock market will respond as favorably during the rest of the fourth quarter as it has under similar circumstances. Still, if one were ever going to "root" for the stock market to have a "bad" day...