The Independent Investor: Should You Be Worried About October?

A common perception on Wall Street is that October is the worst month of the year for the market. It is true that the month has historically failed to provide stellar returns, but it is actually September that deserves the title of the worst market month of all.

The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned.

So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8 percent plunge in the Dow on Oct. 29, 1929. In today's markets, a 12 percent plunge doesn't feel like a big deal but back then it was substantial and it didn't stop there. The market went on to lose 90 percent of its value and usher in the Great Depression.

Then there was the stock market crash of Oct. 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world. Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly.

And how could we forget October 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500's 80-year history. We registered the most down days in a single month since 1973.

Actually, despite these gruesome statistics, October historically turns out to be the seventh-best month to own stocks, tied with April, putting it in the middle of the pack.

September, on the other hand, is the bad boy of the calendar year. It holds the record for most miserable month as far back as 1929. If we look even further back in history we discover the root cause of September's stock market underperformance.

Back in the day, much of 19th-century American commerce consisted of East Coast purchases of newly harvested crops from the South and Midwest regions for sale to the rest of the country. September was harvest month so bankers and other investors would borrow large sums of money from Wall Street, temporarily pushing up interest rates while redirecting money flows away from stocks and into the bond market. This would also coincidentally push down prices in the stock market that month.

Although money flows have long since been regulated by the Federal Reserve for events like the planting season, the tradition of down Septembers persist. Since 1959, the S&P 500 Index has declined an average of 0.9 percent in September. In the first two years of a presidential term, the performance is a bit worse. Overall, investors have suffered the most double-digit losses in that month as well.

In today's world, other concerns might explain September's continued poor performances. There is the "back to work" phenomenon, which occurs just after the Labor Day holiday. Many investors typically take the summer off and when they come back are disappointed to find that their portfolios gained little during the summer months. They lose patience and sell.

One reason for that disappointment may be that a company's earnings for the year have not met the expectations of the market. The normal end of June, early July, quarterly earnings announcements oftentime disappoint. What may have seemed a reasonable expectation by company management at the end of the prior year may not be a reasonable estimate by mid-year for a variety of reasons. The company's stock price may decline or simply mark time temporarily. Many investors won't want to hang around for yet another earnings disappointment at the end of September, so they sell ahead of earnings season.

This year, September has certainly lived up to its reputation with the averages declining almost 5 percent overall while volatility has skyrocketed. The bottom line is that if September is usually the month when crashes occur, then October is the month that ends them. Since September is over, the good news is that we have weathered the worst and if history is any guide, the future should be a bit better.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.