Stocks brace for one of election year's most treacherous months

October is the 'most volatile month of the year for the U.S. stock market'

As the dust settles from the explosive but ultimately inconclusive debate between President Trump and former Vice President Joe Biden on Tuesday, investors are walking into another powder keg.

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October is the "most volatile month of the year for the U.S. stock market and this year won’t be an exception,” said Guy Benstead, fixed-income portfolio manager at Shelton Capital Management, a Greenwich, Conn.-based investment manager with $3 billion in assets.

The benchmark S&P 500 typically declines an average of 0.29%, tying with February for second-worst during an election year and trailing only May’s 1.14% drop.

Benstead thinks worries about political gridlock, pressures on funding markets and concerns over the shadow banking system could result in an “October surprise” that causes a 5% to 10% pullback in U.S. equities.

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Tuesday evening’s debate did little to assuage the fears of investors who had hoped the event would tilt the election toward one candidate or the other. Instead, the heated contest likely left more questions than answers.

“Unfortunately, it doesn’t appear to give any hints, as returns and winners are all over the place,” Ryan Detrick, chief market strategist at broker-dealer LPL Financial, said of the S&P 500’s performance in the month following the first debate.

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The S&P 500’s October returns will be closely followed by stock-market investors who look at the index’s performance in the three months ahead of an election as a reliable predictor of who will win the presidency.

Since 1984, the S&P 500 has predicted all nine presidents when going by the simple formula of gains during the period equating to a win for the incumbent's party, while declines have suggested a change in control, according to data from LPL Financial.

The index, which has correctly picked 87% of all winners, is up 2.81% since its July 31 close — the start of the three-month run-up to the election. Still, a lot can happen between now and Election Day on Nov. 3.

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“Buckle up and prepare to ride out a bumpy 31 days,” Benstead said.