Markets

October Is a Spooky Month for Stocks

Market crashes from decades ago come back to haunt investors’ thoughts every time the leaves start turning.

James Stack is a market historian, investment adviser and president of InvesTech Research, an investment newsletter with its home on the shores of Whitefish Lake, Mont., a world away from Wall Street.

After October stock market crashes in 1929 and 1987 and the October 2008 meltdown during the financial crisis, Wall Street gets the jitters this time of year. Why do past “Shock-tobers” still cause fear? I also recall 1978 and 1979 having October mini-crashettes. But it was Black Monday in 1987 [when the Dow Jones industrial average fell 23%] that cemented October’s reputation as a bad month for investors. Ever since then, whenever October nears, it brings back fears.

Can fear make things worse? Psychology plays a big role in sudden and more-severe corrections. It goes back to the saying from boxer Mike Tyson: “Everyone has a plan until they get punched in the nose.” Every novice investor is buy-and-hold through thick and thin until the market starts falling more than they thought.

What makes October so treacherous? The summer months heading into October tend to be low-volatility months, which often is a precursor to higher volatility. The lull creates a sense of complacency for investors who expect the market only to go up. When it starts going down and drops more than 10%, you end up with an unusually large number of investors suddenly heading for the exit.

It has been a quiet year on Wall Street. Should investors be worried? The largest pullback for the S&P 500 this year has been 4.2%, and there have been only three other years with drawdowns of 4.2% or less in the past 70 years. The average intra-year drop is 13.5%. It would be logical to anticipate a larger correction at some point between now and year-end, particularly with high valuations and a high degree of exuberance and public participation. But it doesn’t necessarily mean a crash is coming.

Do past crashes have things in common? Yes. Prior to crashes in October 1929 and 1987, you had very hostile monetary climates. Interest rates were rising rapidly. In the 90 days prior to Black Monday in 1987, rates went up 1.5 percentage points. We don’t have a hostile monetary climate now, although we could see the Fed take its foot off the gas in coming months. We wouldn’t have to see much of a change in Fed policy to create a bearish climate.

Are you more worried about a Fed misstep, COVID-19 or high stock valuations? I doubt that the residual effects of COVID are going to be severe enough to cause a market panic or crash. And overvaluation doesn’t cause a bear market, but it does raise the risks that when a bear does start it can become a larger one.

So, are rising rates the main threat? That’s the one dark cloud. It worries me because nobody expects it—the Fed said it won’t start raising rates until 2023. But if the Fed is backed into a corner by inflation pressures and starts talking about raising rates by year-end, it could create havoc on Wall Street. The stock market’s dependence on today’s record-low rates makes it the most interest-rate-sensitive market in history. Monetary policy is the wild card and by far the greatest risk.

What should investors do? I’d keep more dry powder as we go through a seasonally unfavorable period, and I’d look at November or December as a time to add to positions.

Most Popular

15 Stocks Warren Buffett Is Buying (And 7 He's Selling)
stocks

15 Stocks Warren Buffett Is Buying (And 7 He's Selling)

Berkshire Hathaway CEO Warren Buffett is a bull once more! The Oracle and his team entered eight new positions and added to others in a big way.
May 17, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The Best Stocks for a Bear Market
stocks to buy

The Best Stocks for a Bear Market

The ideal bear-market stock pick should have a defensive business, a long history of dividend growth and relatively low volatility. Here are 10 stocks…
May 18, 2022

Recommended

Stock Market Today (5/20/22): S&P 500 Narrowly Escapes Bear Territory
Stock Market Today

Stock Market Today (5/20/22): S&P 500 Narrowly Escapes Bear Territory

The S&P 500 was on pace Friday to finish more than 20% below its January record highs, but a late recovery kept the bear at bay for at least one more …
May 20, 2022
Kiplinger's Weekly Earnings Calendar
stocks

Kiplinger's Weekly Earnings Calendar

Check out our earnings calendar for the upcoming week, as well as our previews of the more noteworthy reports.
May 20, 2022
Stock Market Today (5/19/22): S&P Creeps Closer to Bear Market
Stock Market Today

Stock Market Today (5/19/22): S&P Creeps Closer to Bear Market

An earnings bust from Cisco and higher-than-expected jobless claims helped nudge the S&P 500 toward the bear-market cliff.
May 19, 2022
10 Best Utility Stocks for the Rest of 2022
stocks

10 Best Utility Stocks for the Rest of 2022

Income investors like utility stocks for their stability and generous dividends. Here are 10 top-rated ones to watch amid a turbulent market.
May 19, 2022