Education
October is a Scary Month on Wall Street
October has a reputation for being a “bad month” to be in the market. Does this allegation hold up in practice?
For answers, I turned to Forbes’ description of the “October Effect,” which simply states that the stock market allegedly declines in October. Given some of October’s history, it is not surprising that investors respond negatively to the mention of our 10th month. Halloween and market crashes both present scary scenarios for many Americans.
First, we’ll look at some of October’s “greatest hits” on Wall Street. Many of the scariest declines in the market occurred in the month of October, including the “Panic of 1907,” the “Crash of 1929,” and one big event during my personal experience, “Black Monday in 1987,” on which day (the 19th of October) the S&P500 Index dropped 22.7%. 2007 also saw October begin the so-called “Financial Crisis,” which lasted about 18 months, during which the S&P500 Index dropped by about half. Households lost more than $16 trillion in Net Worth.
In each case, economic conditions caused the drops, not the calendar.
Those unsettling events left a lasting stain on the reputation of an otherwise beautiful month, when temperatures and humidity fall to stimulating levels, and Mother Nature puts on her annual color show throughout much of the country. They also contribute to a misguided Wall Street axiom that states, “Sell in May and Go Away.” Don’t tell July about that one, as July generally delivers gains.
Despite the common fears and past events in October’s history, the stock market, on average, rises (erratically) during the month. Among our historically positive market months, the average return in October is the smallest. For my part, I find any monthly market increase satisfactory, no matter how slight. Up is up, and October leads into the generally most profitable months. No one can predict when a year-end rally may begin, and anyone who misses the start squanders a chunk of the usual increase.
What many investors attribute to the “October Effect” is likely based on the “Big V,” for Volatility. Historically, October is the most volatile month of the year. Short-tempered investors are frequently frightened into making stupid moves (Forbes’ term), selling into volatility, and missing out on the upswings.
Today’s lesson is the same one we have touted for decades – get into the market in an intelligent manner, and remain invested, no matter how much it hurts some days. Assuming your investments are long-term (as they should be), the rewards last a lifetime.
