October Can Be Frightful For Investors. Will Politics Make It Scarier?

By Marilyn Geewax

Published October 1, 2016 at 9:00 AM EDT

Traders work on the floor of the New York Stock Exchange on Monday. Rising stock prices typically help an incumbent party in a presidential election year, but October can be a wild month.

It's October now, a month known for apple cider, colorful leaves — and hideous stock-price plunges.

This is the month that brought Americans such horrors as: The Panic of 1907; The Crash of 1929; The Black Monday of 1987; The Asia Market Crash of 1997 and The Financial Crisis of 2008 when the Dow Jones industrial average plunged.

So yes, October, you have a terrible reputation, and we are wary. Especially in this presidential election year — with so much political anger and uncertainty swirling — retirement savers may be wondering: Will you bring us another nightmare?

No one can predict what will happen in this October. But history does provide some lessons about the links between stock prices and presidential elections.

Before looking back, here's where things stand on this first day of October, and the first day of 2016's fourth quarter:

So far, this has been a decent year for stocks. On the last trading day of 2015, the Dow Jones industrial average stood at 17,425. On Friday, the DJIA closed at 18,308, a gain of 5 percent for the year to date.

That's not a thrilling gain, but in some ways, that's been the beauty of the 2016 market: Stock prices rose in the first quarter, and then held steady in the second and third quarter. Given the wild ride investors have taken over the past decade, there's a lot to be said for stability.

So what can history tell us about where we might go from here?

If you are talking history, it's good to use the DJIA as a stock-performance measure because it stretches back to 1896. And here's what the DJIA tells us: upbeat markets and incumbent victories typically go hand in hand.

For example, on Nov. 7, 1940, the DJIA jumped up 4.37 percent, a bounce widely attributed to the re-election of President Franklin Roosevelt who had run for a third term against Republican Wendell Willkie.

At the time, many investors might have preferred to have a Republican in the White House, but with war already tearing apart Europe, another turn for Roosevelt seemed the safer bet.

Then in 1948, when Democrat Harry Truman defeated Republican Thomas Dewey, the DJIA fell 3.85 percent on Nov. 3. Pollsters had been so sure of a Republican victory that everyone was shocked by the outcome, and that spooked the market.

Not only do investors hate Election Day surprises, they like to avoid rocking the boat when markets are doing well. In years when stocks have averaged strong gains, the party in the White House typically wins.

Need recent examples? When Barack Obama tossed out the incumbent party in 2008, the stock market was plunging, down nearly 34 percent for the year. When he won re-election in 2012, the market was up 7.26 percent for the year.

"Large stock market advances during the final three years of incumbent candidates' terms tend to be strongly associated with subsequent landslide victories," according to a 2012 paper by the Socionomics Institute, a research firm in Gainesville, Ga.

Over the last three years, the DJIA has risen 21 percent, which seems to be a good sign for Democratic nominee Hillary Clinton.

However, the candidates — and the stock market — still have to get through the treacherous month of October. This has been a year with many political surprises, and October is a month that often jolts investors.

It's a long way to Halloween.