ET_Mumbai Edition_Oct 02, 2018
October is the Most Scary Month Along with
Others
Bloomberg
Boo! October is here, and that inevitably means fear of stock-market crashes. Whether it is the Great Crash
of 1929 (Black Tuesday) or the 23 percent one-day crash of 1987 (Black Monday), October has some
scary history behind it.
But when we look at the full century of crashes, October is much less frightening than its reputation.
Let’s look closer at the usual fearmongering suspects on the internet, to see if there is anything to their
annual angst. Two things we should be aware of regarding “the most dangerous” of all months: historical
patterns imply elevated levels of volatility, and market returns might be disappointing. 1 The problem with
the statistical claims about October is that we have an awfully small sample set. We have about a 100 or so
Octobers to consider – too small a number to be used for drawing hard conclusions. Worse, the underlying
market structure which may be responsible for some crashes has changed dramatically over that century.
This is not a case of this time is different so much as it is a case of changing market structure, including
lots of new ways to execute and settle trades. This doesn’t mean stocks are immune to trouble; rather, it
suggests old market structure issues have been resolved, perhaps in exchange for a set of new and different
problems. Still, markets have been upgraded and modernized, with old creaky plumbing replaced with new
technology.
Rather than wait a 1,000 years for a sufficiently large sample size, let’s see what we can say with some
degree of confidence about markets in October during the past century. Much of the evidence doesn’t seem
to support the theory that stocks are especially dangerous this month.
Research firm Bespoke Investment Group assembled the data, and found the worst month for market
performance has been September. October has been on average positive. And whatever softness there has
been historically seems to be dissipating.
Average monthly percentage changes for the Dow Jones Industrial Average for the month of October have
been positive 0.40 percent during the past century, with gains 62% of the time. On an annualized basis,
that works out to a 4.8 percent return for a year. During the past 50 years, returns have been 0.84% in
October, for an annualized return of 10%. The market has also been up 62% of the time in October. And if
we consider just the past 20 years — a period that includes the dot-com bust, the financial crisis and a 13-
year bear market – the Dow was positive in 15 out of those 20 years, gaining an average of 2.5% in
October. Annualized, that would be a 29.9% return — the best performance of any month on the calendar,
according to Bespoke. The Standard & Poor’s 500 Index has behaved in a similar fashion.
This is hardly the stuff of nightmares. Given that the 10th month of the year is much less frightening in
reality than its reputation, what might explain this irrational fear of October? My money is on the
psychological power of anecdotal evidence, and the coincidence of two big October market crashes, 1929
and 1987, and 2008, when the market tanked after Lehman Brother’s failure a month earlier sent the financial crisis into high gear.
As is so often the case, the plural of anecdote is not data.
Just consider all of the other notable crashes that have occurred in months that were not October. The tech
bubble began tanking in March 2000; the Flash Crash was in May 2010, the same month as the Panic of
1901. The market seems to have anticipated the recession of 1920–21 by peaking in November 1919, then
sliding until it hit bottom in August 1921.
My favorite parallel to the 2008-09 market debacle was the 1973–74 stock market crash. Stocks peaked in
January 1973, then fell about 57 percent, and bottomed in December 1974. Nary an October date was key
to anything in that mess.
Mark Twain was a notoriously bad investor. As my colleague Mike Batnick explained in “Big Mistakes:
The Best Investors and Their Worst Investments,” every terrible idea of his era caught his attention and
money. And it wasn’t just a matter of what he did invest in, but what he didn’t. Despite his penchant for
foolish speculation, he decided to pass on Alexander Graham Bell’s new-fangled idea, the telephone. He
was that bad.
His misadventures in investing did teach him a thing or two about risk. In “Pudd’nhead Wilson,” Twain
wrote “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July,
January, September, April, November, May, March, June, December, August and February
