By Roberta L Nestor
What is it about the markets in October that make investors jittery? Despite recent years of having somewhat mild October markets, investors still show hesitation at this time of year. What exactly is the “October Effect”? The October effect is a perceived market anomaly that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological expectation rather than an actual phenomenon as most statistics go against the theory. Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month.
For over 100 years, October has been the spookiest month for the stock market and that dates back to the “Panic of 1907”. That particular financial crisis took place in mid-October and over three weeks the New York Stock Exchange lost nearly 50% from its peak the year previous. The headlines were all about the economic recession, run on the banks and trust companies, illiquid markets and the downfall of the Knickerbocker Trust Company which was New York’s 3rd largest trust. The panic spread and many large, and small businesses went bankrupt. Just replace Knickerbocker with Lehman Brothers and you could have been reading the headlines of 2008!
More often the history books focus on the Crash of 1929, also known as Black Monday, there the crash actually started on Monday, October 28th and continued through the 29th. That absorbed $30 billion dollars of investors’ wealth and was the onset to the Great Depression. The next Black Monday was on October 19th, 1987. A precipitous one day drop of 22.60%. That was the worst one day drop in history, and now the next largest loss of wealth – $604 million dollars. That crash was enough to spook investors as they went running to the safety of banks. For years to come, October was known as the largest renewal of CDs in history.
Then there was a mini crash on Friday, October 13th in 1989. This resulted from a fall out from global markets and the bankruptcy of United Airlines. Fast forward to October 27th, 1997 when a global crash was brought on by the economic crisis in Asia. This crash is known for the number of points lost on the Dow Jones Industrial Average (DJIA) as it still ranks as the 8th largest point drop in history. Similar economic crises arose on October 9th, 2002 and on October 11th in 2007 when the DJIA experienced a 20% decline from the peak of the previous year. If the markets themselves are not spooked, investors certainly have been over the years.
Let’s add some perspective to the spooky month of October. Since the market’s inception there have been domestic and now international events that have occurred. And, going forward there will always be domestic and international events that will most likely affect our markets. It is a part of investing, markets tend to react to events. Today, world markets are intertwined as a result of globalization of industries, banking and businesses. However, our markets have historically survived depressions, several recessions, a global financial crisis, a tech bubble that investors will never forget, we have survived wars, terrorist attacks, embargos, gas shortages and oil shortages. In recent years the United States bond rating was downgraded and we had a government shut-down, but the markets continued to march forward. There will always be something happening in our economic world and you can be sure future events will likely continue to affect our markets, even if it isn’t the month of October.
Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or firstname.lastname@example.org.