With October upon us, so is a recurring misperception—that October is uniquely susceptible to sharp stock market declines. But we don’t think investors need to fear. In our view, October’s frightful “Month of Crashes” moniker is based on erroneous logic—and as with all seasonality arguments, Fisher Investments’ research shows investors should avoid letting this myth drive portfolio decisions. With October upon us, so is a recurring misperception—that October is uniquely susceptible to sharp stock market declines. But we don’t think investors need to fear. In our view, October’s frightful “Month of Crashes” moniker is based on erroneous logic—and as with all seasonality arguments, Fisher Investments’ research shows investors should avoid letting this myth drive portfolio decisions.
October’s “crash-prone” reputation stems largely from the several large stock market drops historically occurring in the month. Perhaps most famously, in 1929, sharp drops on October 24 and 29 contributed to a -19.7% decline for the month. [i] Then in 1987, October 19’s -20.5% decline was the biggest single-day drop ever and helped pull the S&P 500 down -21.5% for the month. [ii] October 2008 didn’t have a single awful day, but a smattering of routs drove US stocks’ -16.8% decline for that month. [iii] It also doesn’t help that October’s 0.6% average return lags the overall monthly average return of 1.0%. [iv] With tepid returns and a history of crashes, it is easy to see how October gained its scary reputation.
In our view, however, that reputation is undeserved. For one thing, as March 2020 showed, October doesn’t have a monopoly on awful. Second, the calendar didn’t drive October’s huge drops. All three occurred during bear markets, none of which began in October. The 1929–1932 bear market began in September. There is significant academic debate about what caused October 1929’s crash. Many point to excessively tight monetary conditions, while others allege it was the Tariff Act of 1930—a massive increase to US tariffs on all trade partners globally. No one realistically thinks October was the culprit, a point the next three years’ market declines seemingly support.
The bear market in 1987 began in August as sharply rising price-to-earnings ratios hinted at investor euphoria. The crash itself stemmed largely from portfolio insurance run amok—a market “plumbing” problem with zero relation to the season. Finally, in October 2008, stocks were a year into the bear market accompanying the global financial crisis and just weeks past the failure of Lehman Brothers—a seminal point in the crisis that drove huge negative volatility. The month also featured haphazard US policy decisions that we think exacerbated the negativity.
These negative outliers skewed October’s historical average return lower. Without them, it more than doubles to 1.3%. [v] In addition to missing out on a month that is positive more often than not (61.7% of Octobers since 1926), regular October avoiders would have missed some big months—like in 1974 (16.8%), 1982 (11.5%) and 2011 (10.9%). [vi] Octobers in 1974 and 1982 also happened to fall very close to the beginnings of bull markets—a terrible time to be out of stocks, in our view.
October won’t necessarily be positive this year—short-term volatility (including corrections) are always possible. But in Fisher Investments’ view, what matters for long-term investors is whether any huge, largely ignored fundamental negatives are about to pummel stocks. In our view, the answer is currently no. While Covid-19 containment measures still hamper commerce, they attract nonstop coverage, sapping surprise power. Others fear the nascent economic rebound is reliant on government and Fed support—without which deeper economic pain awaits. But we think their actions functioned more as a bailout than traditional stimulus—tiding over some businesses and consumers to better times rather than kickstarting demand. In Fisher Investments’ view, these and other worries help keep sentiment in check, making positive surprise easier to attain and keeping this bull market rolling.
In our view, fearing a market crash this October because of crashes in past Octobers commits a basic investing error: presuming markets move in patterns. But markets are forward-looking, pricing likely economic and political developments 3–30 months out. As with all past data, historical return patterns don’t enter the calculus. Beyond this, markets are highly efficient—they near-instantly price in widely known factors. If a given month or time of year were consistently positive, for example, investors would logically buy just before and reap the gains—thereby shifting the bump sooner. Thereafter, savvy investors would buy even sooner, shifting the pattern again—and so on, until it moved far from its original spot on the calendar or disappeared altogether. To us, political, economic and sentiment drivers move markets. Not the calendar.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i]Source: FactSet, as of 09/09/2020. S&P 500 Total Return Index, monthly returns for October 1929.Source: FactSet, as of 09/09/2020. S&P 500 Total Return Index, monthly returns for October 1929.
[ii]Ibid. S&P 500 price return, 10/19/1987, and S&P 500 Total Return Index, monthly returns for October 1987.
[iii]Ibid. S&P 500 Total Return Index, monthly returns for October 2008.
[iv]Ibid. S&P 500 average monthly total return for February, May, September and October, as well as overall monthly returns, December 1925–August 2020.
[v]Ibid. S&P 500 average monthly total return for October, 1926–2019, excluding 1929, 1987 and 2008.
[vi]Ibid. S&P 500 average monthly total return for October and monthly returns for October 2011, October 1982 and October 1974.
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