Investors must brace for a turbulent October in the stock market — but they should hold on for a strong 4th-quarter finish, a senior Wall Street strategist says

Reuters

• Investors should brace for a volatile October in the stock market, according to LPL, pointing to historical data that shows October being the worst performing month of an election year.
• But a volatile October will set the stock market up for gains headed into year-end, LPL Senior Market Strategist Ryan Detrick said on Thursday.
• "The third quarter is usually weak, but when it is really strong, like it was in 2020, this says the rally isn't over yet," Detrick explained. 
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The stock market is set for a turbulent month of trading this October, according to LPL's senior market strategist, Ryan Detrick.

In a note on Thursday, Detrick outlined how historical data shows October being the worst month of the year when a presidential election is held.

"During an election year, stock prices tend to be weak from now until late October," said Detrick, adding that "this is the weakest time of the year."

And the first week of October is going along with those historical trends, given that the market fell by as much as 2% on Friday and volatility spiked following the revelation that President Donald Trump and First Lady Melania Trump both tested positive for COVID-19.

The news comes just a month before a highly anticipated election, and adds uncertainty risk to the pre- and post-election investment landscape. 

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But investors shouldn't look to sell out of the market in anticipation of a potential negative October because the year-end outlook remains bright, according to Detrick, who cited historical S&P 500 data dating back to 1950.

First, the fourth quarter is historically the best quarter of the year for stocks, with average gains of 3.9% and stocks up 79% of the time. And on top of that, during the fourth quarter of an election year, stocks are up an average of 2% and are positive 82% of the time.

But most importantly, strong performance in the third quarter tends to bode well for the fourth quarter, according to Detrick. 

Typically, the third quarter of the year is weak for stocks, having posted an average gain of 0.6% and been up 61% of the time. But in 2020, this wasn't the case, with the S&P 500 delivering a return of 8.5% in the third quarter.

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When the S&P 500 has seen strong third quarter returns of more than 7.5%, the fourth quarter posted an average return of 7.3% and was positive 100% of the time, according to Detrick.

"The third quarter is usually weak, but when it is really strong, like it was in 2020, this says the rally isn't over yet," Detrick explained.

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