Does October Deserve its Bad Reputation?

(eToro Blog) Whew! One down (and only 21 more trading days to go) and Wall Street traders made it through the first day of October relatively unscathed; the DJ30 and the SPX500 were both higher at the day’s end, and the NSDQ100 edged lower by only a few points. It could have been worse. October is a very unique month in the financial markets, and some investors worry that the October effect could wreak havoc on their portfolio. But is it a valid concern? Within the past 80 plus years, Octobers have always seemed to be the month when bad things have happened in the U.S. stock markets and these three occasions were among the worst.

Panic was rampant during the month of October 1907, when legislative actions threatened trust accounts and led to a period of shrinking credit. Runs on the banks of the day were the norm, and there was a panic-induced sell-off at the stock exchange. There was no Federal Reserve in existence (yet), but a consortium of banks led by J.P. Morgan worked to diffuse the situation.

The most notable of all stock markets crashed occurred over the course of several days in October 1929. On Thursday, October 24th and Friday, October 25th, more than 13 million shares were sold on the New York Stock Exchange, and only an intervention by several wealthy private investors and financiers were able to briefly halt the slide. But the slide resumed in earnest the following Monday, despite efforts by the bastions of Wall Street to prop up prices. Panic reined again on Tuesday, October 29th, when some 16 million shares were sold off. All in all, the market lost $30 billion, which would be equivalent to more than $380 billion today.

In recent memory, October 19, 1987 was to be forever known as Black Monday. The “crash” had in fact begun the previous Friday, when the DJ30 had lost 4.58% of its value, an equivalent of nearly 585 points today. Analysts had not expected the slide to continue and many portended a rise when markets opened up the following Monday but they were wrong. By the day’s end, the DJ30 had lost 22.6% of its value, in today’s market that would be equivalent to nearly 3000 points. Only a collective intervention by the Federal Reserve and other members of the G7 which flooded the markets with cheap cash held the drop in check. A flaw in the exchange’s electronic program trading allowed the execution of stop-loss orders which triggered still more.

Besides those, there had also been a mini crash in October 1989, a 554-point drop for the DJ30 in October 1997 and a financial meltdown in October 2008. But historically, October isn’t even the worst of the months, with data suggesting that September holds that honor, but many blame the psychological October effect on a trader’s hesitancy.

Last year, the DJ30 lost 258 points on the first trading day in October, and another 276 points on the last. However, in between the first and last trading days there had been enough up days for the month to end up 9.5% higher, the largest single-month’s gain in a decade. What does that suggest? Simply this: “Past performance is not indicative of future results.”

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