October Stock Market Outlook: Why the Crash-Month Myth Misses

October carries a reputation as the stock market's scariest month, and Wall Street is bracing for another volatile one. The October stock market outlook, though, is more complicated than the calendar alone suggests: the data say the month is not the monster it is made out to be, even as bond yields near multidecade highs give investors genuine reasons for caution.

The fear has a famous pedigree. According to a MarketWatch analysis of the October stock market outlook published Sunday, the month's grim reputation rests largely on a handful of notoriously bad selloffs. "The month has a somewhat undeserved reputation as a tough one for stocks for much the same reason the otherwise commonplace words 'titanic' and 'iceberg' are inextricably linked," Wall Street veteran Nicholas Colas, co-founder of DataTrek Research, said in commentary shared with MarketWatch on Friday.

The fear is mostly overblown

Since 1928, the S&P 500 has averaged a gain of half a percent in October, with a win rate of 58%, according to Dow Jones Market Data. That puts the month in the bottom half for performance, but not at the bottom: February and September are the only two months with a negative average return.

The crashes of October 1929 and 1987 were particularly memorable, and October 2008 was brutal as stocks sank during the most acute phase of the global financial crisis. Colas added more examples to that list: October 1990, when stocks bottomed after Iraq invaded Kuwait; October 1997, during the Asian financial crisis; October 2002, when the S&P 500 finally bottomed after the long post-dot-com bear market; October 2011, when the Greek debt crisis rattled confidence across markets; and October 2022, when the index put in its most recent bear-market low.

What analysts actually worry about

This year, the worry is the bond market. According to Colas, rising Treasury yields caused problems for much of the U.S. market in September, even as a small group of hot stocks connected to the artificial-intelligence trade offset many of those losses at the index level. The belief that hot tech stocks are immune to the pressure of rising interest rates made the tech sector the only gainer in the S&P 500 last month. Colas argues the resulting hollowing-out has left the market fragile: enormous expected earnings growth has shielded AI stocks so far, but the trade can only resist the pull of rising rates for so long.

The 10-year Treasury yield climbed to 5.34% on Thursday, its highest level in 24 years, according to a report from The Rich Reporter citing Reuters data. The Federal Reserve raised interest rates last month for the first time in three years to bring down above-target inflation, and the October stock market outlook now turns on whether another move is on the way.

Why the bulls still like the setup

Friday showed what relief looks like. Treasury yields slipped early in the session, which sparked a broad rally in stocks, Jose Torres, a senior economist at Interactive Brokers, told MarketWatch. The move in yields reversed by the closing bell, yet the major equity indexes still finished broadly higher. "Friday showed us that when yields go down, equities should soar," Torres said.

For investors parsing the October stock market outlook, history adds a midterm-year twist. A Dow Jones Market Data analysis found that the month leading up to Election Day has been a notably strong stretch for equities, with the S&P 500 averaging a 3.9% gain since 1950. The fourth quarter has also consistently delivered the strongest returns of any calendar quarter, and November has produced more record closing highs than any other month: 174 of them, according to Dow Jones Market Data and FactSet.

The playbook if October turns rough

If stocks do slide, Colas has a playbook for the October stock market outlook that he has used before. He watches the Cboe Volatility Index, Wall Street's so-called fear gauge, for signals to buy the dip. A reading of 27 sits one standard deviation above its long-term average of 19.4, and the S&P 500's one-month win rate after readings between 27 and 43 is 70%, Colas said. The gauge closed Friday around 15.5, per FactSet data, a tame reading despite what he describes as weakness beneath the surface.

Last week illustrated that fragility. The Nasdaq Composite added 0.5% to close at 27,190.86, just 0.2% below its September record close, while the S&P 500 fell 0.3% to 7,722.72 and the Dow Jones Industrial Average lost 1.3% to finish at 51,176.96, according to Dow Jones Market Data.

The near-term catalysts are clearly signposted, and they will shape the October stock market outlook in the weeks ahead. The odds currently favor the Federal Reserve holding rates steady in October but raising them in December, and any pause in the fresh hiking cycle could increase investors' appetite for stocks. Weaker-than-expected jobs data on Friday reinforced the view that the central bank may hold off this month. A slate of Fed speakers this week could still move a jittery bond market, and minutes from September's central-bank meeting are due on Wednesday.