Will ‘Sweet September’ lead to ‘October Pains’? By Investing.com

Investing.com — As September 2024 wraps up on a bullish note with gains across major indices, many investors are turning their attention to the historically volatile month of October. 

The market is showing signs of optimism, but the question remains: Will the “Sweet September” gains turn into “October Pains”? 

September, traditionally one of the weakest months of the year for markets, defied expectations in 2024. 

The , , and NASDAQ (NASDAQ:) posted gains despite the usual post-Labor Day selling pressure.

By September 25, the DJIA was up 0.8% for the month, while both the S&P 500 and NASDAQ followed suit with positive momentum, as per a newsletter by the Stock Trader’s Almanac.

This bullish performance can be due to the Federal Reserve’s 50 basis point interest rate cut. 

The reduction in rates provided a tailwind for stocks, boosting investor confidence despite some areas of the market lagging behind, such as small-cap stocks, which struggled to make sustained gains.

October has been known for volatility, often marked by sharp declines and even crashes, particularly in election years. 

Historical data indicates that October ranks as the worst month for election-year performance across the DJIA, S&P 500, and NASDAQ, the newsletter said. 

The , an index of small-cap stocks, also tends to underperform in October, with average election-year losses ranging from 0.9% for the S&P 500 to 2.4% for the Russell 2000.

However, in recent decades, October has not been uniformly negative. In fact, over the last 21 years, October has ranked as the fourth-best month for the DJIA, S&P 500, and NASDAQ, and sixth-best for the Russell 2000​. 

The economic backdrop heading into October remains cautiously optimistic. The second quarter GDP growth met expectations at 3%, while  Atlanta Fed’s GDPNow model is forecasting 2.9% in the third quarter.

Inflation continues to trend downward but remains above the Fed’s target of 2%. Corporate earnings have largely beaten expectations, and employment data, while softer, remains relatively stable​.

The Fed’s recent rate cut signals the start of a new easing cycle, which has historically been bullish for markets. 

However, the concern remains that aggressive rate cuts—more than 2% in a year—can indicate deteriorating economic conditions and lead to market declines. 

“However, should the Fed continue to cut aggressively at the next two meetings that would be a concern,” the newsletter said.

On a technical level, the DJIA and S&P 500 have broken out to new all-time highs, but the NASDAQ has not yet followed suit, and small-cap stocks remain weak. 

Market breadth indicators suggest that while many stocks are moving higher, the gains are not evenly distributed, with technology stocks leading the charge.

One key technical signal to watch is the Seasonal Moving Average Convergence Divergence Buy Signal, which will open on October 1. 

If the market consolidates recent gains, a more favorable entry point for buying could emerge, setting the stage for a potential continuation of the rally later in the year​.

The 2024 U.S. election looms large over the markets. Historically, the market tends to stabilize once the election is over and a clear outcome is established. 

However, the current political landscape, with concerns over a contested election or disruptions, could add to October’s volatility.