Seasonality is not just driven by fundamentals: emotions and calendar seasons also have a significant influence on stock prices. Especially when the calendar changes from summer to fall, the mood of investors tends to change as well.

With respect to sharp stock market declines, the month of October has “earned” a bad reputation over the decades. The largest single-day decline in history happened on “Black Monday” October 19 1987 and saw the Dow plummet 22.6%. Moreover, October has historically been the most volatile month. According to Macro Risk Advisors, the CBOE volatility index, a.k.a. the VIX, on average tends to jump to an annual peak of more than 21 points over the past 30 years during October.

In this column, I will analyze the seasonal patterns of the S&P 500 Index and of one of the hottest stocks on the market, Tesla (TSLA).

Will Tesla Drive the Market in October?

Tesla does not need a special introduction. It is one of the stocks that receives undivided attention from the media and investors and is the subject of numerous interesting debates over its (over)valuation. The stock’s moves in the past few months have put a smile on the faces of many investors - provided they had a long position, that is.

The stock received an additional shot in the arm in the summer when the company announced a stock split.

But what exactly is a stock split? In a stock split a company divides its existing shares into multiple shares. Technically speaking, stock splits don’t change the value of a company or the value of investors' holdings. However, the strategy does reduce the price of individual shares, which can enhance a stock’s liquidity by making it more accessible to retail investors. And during the COVID -19 pandemic retail investors held enormous sway in the market, while large institutional investors took a back seat.

Since the beginning of this year, Tesla’s stock price has quadrupled. There was a setback in September when the stock was not included in the S&P 500 Index due to its “shaky fundamentals”.

But what will the situation look like in the frequently crash-prone month of October?

To this end let us examine the seasonal chart of Tesla, which shows the seasonal pattern of the stock over the past 10 years.

Seasonal pattern of Tesla over the past 10 years

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Tesla typically delivers weak seasonal returns during the month of October.
Source: Seasonax 

I have highlighted the weak seasonal phase from September 19 to October 22. On average Tesla has delivered a very poor annualized return of -49.47% during this period.

Even more important is the pronounced consistency of the negative returns generated during this phase, which suggests that this pattern is highly reliable.

The bar chart below depicts the return delivered by Tesla in the relevant time period from September 19 to October 22 in every year since 2010. Red bars indicate years with negative returns.

Pattern return for every single year since 2010

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Whether this pattern will recur in 2020 it is hard to predict but our detailed statistical analysis will provide you with an additional edge in your investment process.

Is the “October Effect” Overrated?

To answer this question we have conducted a close examination of the seasonal patterns of the S&P 500 Index.

Please note, unlike a standard price chart that simply shows stock prices over a specific time period, a seasonal chart depicts the average price pattern of a stock (or index) in the course of a calendar year, calculated over several years. The horizontal axis depicts the time of the year, while the vertical axis shows the level of the seasonal pattern (indexed to 100). With that in mind, let us examine the seasonal chart of the S&P 500 Index, which shows the seasonal pattern of the index over the past 25 years.

Seasonal pattern of the S&P 500 Index over the past 25 years

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The S&P 500 Index typically delivers weak seasonal returns during October.

I have highlighted the weak seasonal phase from September 19 to October 26. On average S&P 500 has delivered a negative annualized return of -16.24% during this period. In this period we can also detect two extremely severe price slumps, one of - 26.69% in the course of the 1987 crash and one of -32.36% in the course of the financial crisis of 2008.

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Pattern returns since 1985 do not look too appealing (blue bars indicate years with positive returns and red bars represent losses).

By removing the statistical outliers you can review an even more nuanced analysis with the help of our seasonal charts.