October may have a bad reputation, but stocks are entering a normally

October may have a bad reputation, but the fourth quarter has mostly been a positive time for stocks.

Despite worries about central bank tightening, the debt ceiling, Chinese developer Evergrande, and Covid, many strategists expect stocks to eclipse recent highs after a rocky period in October.

The S&P 500 has averaged outsized gains of 3.9% in the fourth quarter and was up four out of every five years since World War II, according to CFRA. The next best quarter is the first, with an average gain of 2.3%. The worst is the third, up just 0.6%.

“Q4 2021 will likely record a higher-than-average return. However, investors will need to hang on tight during the typically tumultuous ride in October, which saw 36% higher volatility when compared with the average for the other 11 months,” notes CFRA chief investment strategist Sam Stovall.

The S&P 500 eked out a small gain for the third quarter, but was down nearly 5% for the month of September, with a bad ending as the S&P 500 dropped 1.2% on Thursday.

Bespoke Investment Group analyzed the behavior of the S&P 500 in years when it was up solidly year-to-date heading into the fourth quarter. In those years, the market typically gained in the quarter, but there were weaker than normal returns in October and the quarter itself, when September was a negative month.

“The S&P 500 has been down in September 50 times since 1928, and in those years, it has actually averaged a decline of 0.41% in October and a gain of just 0.75% in Q4,” Bespoke noted. When September’s performance was positive, the S&P gained a much stronger 1.6% average in October and an average 5% in the fourth quarter, according to the firm.

Bespoke found that while October is remembered for stock market crashes, like 1929 and 1987, the market is usually positive. The Dow, for instance, gained 60% of the time in October over the past 50 years, averaging an increase of 0.5%. It was negative most of the time in September, with an average loss of 0.9%.

Jobs, jobs, jobs

One of the first hurdle markets face in the new quarter is Friday’s employment report, potentially one of the final triggers for the Federal Reserve’s decision on when to taper its $120 billion a month bond buying program.

Economists expect about 475,000 jobs were added in September, according to an early consensus figure from FactSet. Just 235,000 payrolls were added in August, about 500,000 less than expected.

“The only way I could see them delaying the tapering is if we get a very weak number, something closer to zero,” said Ethan Harris, head of global economic research at Bank of America. “Anything that looks like 100,000, 200,000, they just go ahead [with the taper].”

Harris said the biggest concern for the economy remains Covid, though new cases are slowing.

“The big question is when does the Covid story start to fade a bit, allowing activity to come back,” he said. He expects the pandemic continued to be a big factor in the labor market in September

“We think fear of getting Covid on…