Why October's Gains Don't Mean a Thing

Before you go, we thought you'd like these...
Before you go close icon

In case you somehow haven't already heard from all the financial news sources following the market, yesterday's Halloween massacre kept the Dow Jones Industrials (INDEX: ^DJI) from setting a record for the month. But even though short-term trends can be interesting to track -- and good fodder for cocktail-party trivia contests for years to come -- they're completely irrelevant for anyone who has an investing time horizon of more than a few weeks.

Stock-toberfest is over
What got short-term stock watchers so excited about the Dow over the past week is that the average had a chance to post its best October in its 115-year history. With the big gains since the end of the third quarter, all the Dow had to do was avoid a loss of more than around 150 points. Unfortunately, the stock market couldn't hold those record gains.

But even with yesterday's sell-off, both the Nasdaq and the S&P 500 managed to post double-digit percentage gains of 11% each for the month. Though not record-breaking, the Dow's gain of more than 9% gave investors plenty to be happy about.

Still, before you whip out the champagne and gorge on your Halloween candy stash to celebrate your profits, you need to put October's gains into perspective. Even leaving aside the true long run, the jumps that many stocks saw last month didn't even manage to earn back their losses since the beginning of August.

Seeing the big picture
Across the market, many stocks performed even better than the broad indexes. But when you look back further than October to see how those stocks have done in recent months, the news looks far less exciting.

For example, financial stocks did especially well, with both Citigroup (NYS: C) and JPMorgan Chase (NYS: JPM) blowing out earnings estimates and showing promising trends on future business conditions. But even though Citigroup jumped more than 23% in the past month, it's still down almost 18% over the past three months. Similarly, JPMorgan Chase's 16% gain for the month still left it with a 13% loss in the past quarter.

The phenomenon goes well beyond the financials, though:

  • Ford (NYS: F) saw big gains despite a mildly disappointing quarterly report that cast doubt on how quickly the company would regain its investment-grade credit rating and start paying a dividend again. But even after a better than 20% advance for the stock, it's still down slightly since late July.
  • Freeport-McMoRan Copper & Gold (NYS: FCX) rebounded by 33% in the past month as prospects of a double-dip recession faded in the glow of Europe's big bailout package and better economic data. Nevertheless, it's still off its July levels by more than 20%.
  • Energy stocks like Occidental Petroleum (NYS: OXY) and Schlumberger (NYS: SLB) also recovered nicely during October, as oil prices bounced off their recent lows. But the rebound still leaves those stocks down over the past three months, with Schlumberger having fallen a sizable 18%.

In all, more than three in 10 of all stocks included in the Russell 1000 index of large-cap companies gained 15% or more in October but were still down for the past three months.

What's next?
Of course, just because stocks are still down doesn't mean that yesterday's drop is just the beginning of something bigger. In fact, you could just as easily argue that despite October's gains, stocks are still a fairly good value at current levels.

But what you shouldn't do is let yourself get carried away about October's big gains. It's a new month now, and over the long run, what happens in a single month will be just a drop in the ocean of your total returns over a lifetime.

One great way to get strong long-term returns is with high-quality dividend stocks. The Fool's brand-new special free report reveals 11 rock-solid stocks that pay great dividends.

At the time this article was published Fool contributor Dan Caplinger loves cocktail-party trivia. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase, Citigroup, Ford, and Freeport-McMoRan. Motley Fool newsletter services have recommended buying shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy holds the record for awesomeness.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners