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Could the stock market stage a mighty comeback before the end of 2018? History suggests so

Here at the Fool, we recognise the futility of trying to make predictions about the direction of markets, at least in the very short term. Indeed, one of the most curious things about investing in equities is that we can be far less confident of where the main indexes will be in a couple of months compared to where they will be in a couple of decades. So, the simple answer to whether things will pick up before the end of 2018 is: no one knows.

Notwithstanding this, I think that looking to the past to get a feeling for what might happen could be useful.

Goodbye and good riddance

It’s fair to say that the vast majority of investors can’t wait to see the back of October. With the FTSE 100 and FTSE 250 down almost 8% and 10% respectively before markets opened this morning, that’s somewhat understandable.

It may, therefore, surprise Foolish readers to learn that the 10th month of the year is traditionally one of the best in terms of performance. It’s just that when markets do wobble in October, they wobble rather violently. Those old enough to remember the 1987 crash — during which the FTSE 100 fell 12.2% in a single day — will surely agree.

Given that this October has been such a shocker, does this mean we can expect things to get even worse in November? Not necessarily. The latter tends to be a fairly average month if the past is anything to go by.

According to research conducted by Steven Eckett — author of Harriman’s Stock Market Almanac — the FTSE 100 has climbed in 59% of years in November, leaving it slap bang in the middle in terms of performance compared to the other 11 months.  

Perhaps more interestingly, November tends to be the start of the strongest half of the year for markets (in contrast to May-October). So, if you’re an advocate of the ‘Sell in May’ theory, it would seem logical to load up on shares going into the end of the year.

So, things could pick up?

Again, we can’t say for sure. Nevertheless, records suggest December to be the best month of the year for equities. 

The FTSE 100 index has climbed in 78% of all years since 1984 with the final two weeks of trading before the Christmas break tending to be the strongest in the whole year. If there is to be a Santa Rally, Eckett suggests focusing on what happens on the 9th trading day of the month. This tends to be the moment at which things really shift up a gear.  

Of course, anything can happen. Should interest rates in the US continue to rise, Brexit negotiations fall apart (again) and the economic situation in Italy go from bad to worse, there’s every chance that 2018 will end on a low note. Banking on an end-of-year rally to make up for (paper) losses sustained over October isn’t advised. 

As always, any investments should be based on a sober analysis of what you’re trying to achieve and by when. Those nearing or in retirement and fearful of a bear market might consider moving to less risky assets. In contrast, I think those with decades of investing ahead of them should think about taking full advantage of any sustained weakness so long as funds allow.

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The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.