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September lived up to its reputation as being, historically, the worst month for stocks. Despite the September stock market crash, there’s a good chance stocks could experience another sell-off in October, and it could be worse. The negative sentiment goes beyond October too, it appears as though November, December, and January are setting up to be exceptionally volatile as well.

Could Stocks Sell-Off in October?

As we noted in a previous article, September is the worst month for stocks and a sell-off was not out of the question. We were right. From March lows to the end of August, the S&P 500 soared 60%, erasing all losses associated with the coronavirus pandemic sell-off. Sitting in record territory, it looked like September was going to be a good month for stocks. But it wasn’t.

Panic set in as a result of high stock market valuations, political uncertainty, and a global economy reeling from the still uncontained coronavirus pandemic. And stocks crashed. The S&P 500 recovered a little by the end of the month, but still finished September down 4.1%.

As we start the fourth quarter, investors are looking for a strong end to 2020, but they might not get it. Things could derail again in October. And the long-term outlook for the stock market is just as bleak. Until recently, investors were only expecting volatility to extend into October.

The VIX volatility index, often referred to as a fear gauge, is sitting at around 26.0 and is up 96% since the start of 2020. The VIX falls when stocks rise and rises when stocks fall. At these levels, it suggests investors are worried about not just the direction of the U.S. and global economy, but also the chances of a contested U.S. election.

The stock market does not like uncertainty and the chances of anyone knowing who wins the U.S. presidential election on November 3 is remote. And if President Trump or former Vice President Joe Biden contests the election, stocks will most likely slide.

In the grand scheme of things, the volatility will be short lived because we’ll know by inauguration day on January 20, 2021 who will occupy the Oval office, but it still covers a fourth month span. A lot can happen in four months.

What Other Factors Could Lead to a Sell-Off in October?

As if the growing chance of a contested U.S. presidential election wasn’t enough to sow seeds of discontent on Wall Street, there are a number of other factors that could lead to a sell-off in October.

Q4 Earnings Season

For starters, October 1 is the start of the fourth quarter and the kick-off to earnings season. And it could get ugly. Profits are expected to fall more than 20% on a year-over-year basis, the second worst showing since the 2009 Financial Crisis. It’s bad, but still better than the second quarter, when earnings cratered 30%, the most since the 2009 Great Recession.

COVID-19

There’s a reason why earnings are falling off a cliff and the world is stuck in global recession: COVID-19. The Canadian and American economies were gutted during the second, and probably third quarter, as businesses shuttered their doors and laid off employees.

All of which decimated sales, ate up capital, and lead to increased debt loads. Unfortunately, the number of reported COVID-19 cases is on the rise, and a second wave could result in another stock market sell-off in October. If uncontained, it could get worse in November and December, which again, would wreak havoc on corporate America and Canada.

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