The stock market is set for a great day at the office today as the Dow Jones index started a new month up nearly 3%, which is a big 854-point move for one day. This is a nice start to the share market for the December quarter, which I’ve always argued was probably going to be the turnaround time for stocks after months of overselling.

So can you trust October? Historically, it has been the month when markets crashed; in the 1929 Great Depression crash and the famous 1987 crash.

In fact, the month will get stress-tested on Friday this week, with the US getting their latest jobs report for September. If those numbers don’t show a slowing labour market is being hit by those big 0.75% interest rate rises from the Fed, then stocks will slide next week.

And they could slide even further after October 13, when the Yanks get their latest Consumer Price Index number. If this remains stubbornly high, then stocks will remain stubbornly low, and even go lower!

On the flip side, if these two data drops show that rate rises are working, the ‘thinking’ will then turn to ‘believing’ that big rate rises could be reduced and the final increase could be closer than what the market has been thinking when it has oversold stocks.

Want local proof? Well, try Macquarie, which looks like a real bargain, if you’re a ‘buy and hold’ type.

Macquarie Group (MQG)

In early January, MQG was a $215 stock. Today it sells for $151.41. If you believe over the next two years it could go back to $215, that would be a 42% gain plus dividends, so let’s round it off to 50%.

Even if it took four years to get back to $215, you’d have an average capital gain of 12.5% a year! And I reckon MQG won’t need four years to pass its old high.

So all we need is a run of data that shows inflation is coming down and a lot of this market negativity will turn to positivity.

That said, we still have the historical worry about what October can do to stocks, but is this a threat we should be spooked about?

Investopedia’s Adam Hayes suggests ‘no’ is the answer.

“The October effect is a perceived market anomaly that stocks tend to decline during the month of October,” he writes. “The October effect is considered to be more of a psychological expectation than an actual phenomenon, as most statistics go against the theory. Some investors may be nervous during October because some large historical market crashes occurred during this month.”

Hayes points out that September is actually statistically a stock shocker, and 2022 has supported that claim, with the US market down nearly 6% and our market down about 5.5%.

Even these are just big sell-offs for a month but don’t represent crashes, like that of the November crash of 2007 and September/October of 2008 with the GFC. In total, stocks fell over 50%! That’s a crash.

I don’t want to build up your hopes that the October 7 US jobs report and the October 13 inflation reading will be the catalyst for an overdue market rebound because you can’t expect official statistics to give you a timely window on what’s going on in an economy. But they just might. If, however, they don’t, then November could be the month the market has to have, or maybe December.

The bottom line is that central banks, like our RBA today, are raising rates to kill inflation, and while they will give out messages that they aren’t backing down until they win, they are scared they’ll go too far and create a bad recession.

As soon as the economic data screams “mission complete”, central banks will stop this madness, which even has NAB’s very respectful chief economist, Alan Oster, worrying about too many rate rises. In The Australian today, he reminded us that the RBA sunk the economy in 1989 with too many rate rises and we rolled into a rough recession in 1990.

Like most economists, Oster thinks the RBA will do a 50 basis points rise today and 25 basis points in November, but given the delayed effect of rate rises, the RBA’s Dr Phil Lowe is in risky territory.

I’m hoping he listens to the CBA’s economics team who think it’s time for a 0.25% rise today, but I suspect he’ll play Mr Tough Guy for one more month.