Interactive Investor

What to expect from the stock market in October 2020

28th September 2020 08:54

Lee Wild from interactive investor

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It has a bad reputation, but stocks have actually done well at this time of year in the past.

The long, warm summer is well and truly over, and professional investors are back at their desks, developing strategies for the rest of this year and beyond. After a peculiar six months, given the pandemic and its impact on the global economy, plus a slew of events in the diary, it promises to be an action-packed end to 2020.

This summer has been an unusual one in that fortunes have very much depended on where you have been invested. For instance, the FTSE 100 index ended the three summer months down 1.8%, but just 100 points from where it started, but the Nasdaq index of top 100 US tech shares jumped almost 27%.

Such a dramatic contrast in performance has much to do with the pandemic, which has got us all using the internet to buy more stuff. Companies that make a living from the web like Amazon (NASDAQ:AMZN) and Zoom (NASDAQ:ZM) have done very well. But the UK’s top 100 index is full of oil companies and banks, businesses that haven’t benefited from lockdown. Demand for oil products has decreased, while low inflation and the risk of bad debts during the recession have hurt the banks.

Against this backdrop, and with governments acting to prevent a ‘second wave’ of Covid infections, negotiations between the UK and Europe about a post-Brexit trade deal are ongoing. Agreement must be reached soon if it is to be ratified by the EU by January. The transition period ends on 31 December. Meanwhile, in the US, there’s a presidential election pencilled in for 3 November. 

So, there is lots for investors to consider currently, and at a time of the year which has a reputation for been one of the worst months to invest in shares. 

Many of the big stock market slumps have occurred in October, think the Wall Street Crash in 1929, Black Monday in 1987, and big falls during the Financial Crisis in 2008, which isn’t great PR for October. However, the facts show that this reputation is not justified.  

The FTSE 100 index might have fallen in October the past two years, but it has risen in that month for seven of the past 10 years in what was a golden period for global equities.

Winning strategies

In reality, with many variables at play, circumstances differ each year and, of course, unpredictable positive and negative catalysts do occur. Yes, October can be volatile, but don’t write off the entire month just because of a few bad years stretching back to 1929.

Indeed, there are strategies that can keep you investing through thick and thin, and which have historically proved very profitable over many years.

First is regular investing, buying shares or funds at the same time every month for a long period of time. Even if the stock market falls, investing the same amount of money each time means you’ll buy more of the shares or fund units because they are cheaper. When the stock market rises again, as it has through history, the value of your holding increases. 

This process is known as pound cost averaging and is a strategy that works particularly well in a falling market, perhaps when you are in a more cautious mood. Think of it as insurance against FOMO, the fear of missing out, on a market rally.

Time to watch our Winter Portfolios again

Another strategy proven to work consistently over a period of years looks to exploit the strongest time of the year for stock markets. Research has demonstrated that the six months between the end of October and end of April has historically generated better returns than if you had stayed invested all year round. 

In 2014, interactive investor built two Winter Portfolios to exploit this stock market anomaly – a consistent portfolio and higher-risk aggressive portfolio, both made up of five stocks with the best track record of performance over the winter months. The consistent portfolio has beaten the market every year since, including during the pandemic. The aggressive portfolio had too until this year, pipped to the post by a whisker. 

This year’s portfolio stocks will be revealed on the website and in our popular daily and weekend newsletter in the final week of October. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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