'Shock-tober' ends on upbeat note for stocks

NEW YORK -- The worst month for stocks since October 1987 — dubbed "Shock-tober" and "Black October" by pundits — ended on an upbeat note last week, with stocks rebounding 14.1% from their bear market lows.

As if last month's market turbulence wasn't historic enough, investors are gearing up for another potentially game-changing event: Tuesday's presidential election race between Democrat Barack Obama and Republican John McCain.

The nationwide vote comes amid the worst financial crisis since the 1930s, one that is likely to tip the economy into a serious recession. The Standard & Poor's 500 index last Monday was down 46% from its October 2007 high, before bouncing back and ending the month 38.1% off its peak.

The ability of stocks to reverse course and rise sharply in the final four days of October has raised hopes that the worst of the stock market decline is finished. While history has shown that October is susceptible to stock market crashes — 1929 and 1987 are the most famous examples — the 10th month of the year has also earned a reputation as a "bear market killer."

The Dow's last two grizzly bear markets — 2002 and 1987 — all died in the month of October, which served as launching pads for new bull markets.

The still unanswered question is whether the bottom is in. "The odds," says James Stack, president of InvesTech Research, "are high that we are either near, or past, a market bottom."

Stack says gloomy headlines, record stock price swings, and the highest level of stocks hitting new 12-month lows in the past 50 years are signs that have been present at other market bottoms. Also boosting stocks is the fact that many of the government's actions to unfreeze lending are beginning to work, adds Don Luskin, chief investment officer of TrendMacro. Stocks are also entering a six-month seasonal sweet spot, when returns have tended to be good.

With investors searching for fresh leadership and pushing for change, the election of a new president is likely to keep the positive momentum going on Wall Street, despite the ongoing problems in the economy and financial markets, says Jim Paulsen, chief investment strategist at Wells Capital Management. "This election will matter more because it will be a new president no matter who wins," he says. "Change and fresh leadership is important. It's a fresh start."

While no one knows how long or how severe the recession will be, knowing who the next president will be at least "rids the market of one of the uncertainties" it's dealing with, says Bill Stone, chief investment strategist at PNC Wealth Management.