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Coastal residents from Florida to New York can start to rest a little bit easier from fears of being battered by tropical storms. But for investors, that’s just when things can tend to get a bit rougher in the stock market.
Stocks have historically seen tumultuous times during October, and that’s something no savvy investor should ignore. “October is a scary month,” says Sam Stovall, chief investment strategist at the financial research company CFRA. It’s frightening because, more than any other month, that’s truly when traders should expect the unexpected—something that should make anyone more nervous during this pandemic, when the market oddly has held its own for much of the time.
It’s “known as the jinx month,” writes Jeff Hirsch, editor-in-chief of the Stock Trader’s Almanac. Older readers may remember the crash of 1987, when on so-called Black Monday, the S&P 500 index of large-cap stocks dropped 21.8 percent, the record for the deepest decline in any single day. Staggering drops like that alone tend to remain etched in the memories of Wall Street pros. But the list goes on: there was the crash of 1929, the “back-to-back massacres” in 1978 and 1979, the Friday the 13th drop in 1989, and the drop in 1997. And, of course, there was also the market drop in October 2008.
If it were as simple as being sure that in October stocks always perform badly, there’d be nothing to worry about, because investors could just sell stocks. The real issue is that October is by far the most volatile month of any in the year. That means stocks are far more likely to see wild swings up or down during the tenth month of the year. “October has the highest standard deviation with the deepest one-month decline and also highest one-month advance,” Stovall says. Standard deviation measures disparity of returns—the larger the figure, the less stable the movements in stocks are likely to be. Or put another way, a higher standard deviation means that investors might get delivered bonanza returns or desultory ones.
Why does this happen? Part of the matter is the Wall Street practice known as window dressing. Many fund companies have fiscal years ending in October, so they will scramble to dump poor-performing stocks and show only “winning” stocks. Depending on the year, that can mean many funds dump large volumes of stocks during the month. It works vice versa. Funds may want to increase their holdings of stocks that have done well. With large trades taking place in the market, you can expect wild swings in the indexes.
As you are reading this column, the upcoming month’s potential harm may seem small compared to the highs and lows the market has already reached this year. Certainly, the pandemic could throw any pattern out of whack, although many investors have been holding their breath since the spring. In any case, it’s good to know that returns tend to be higher in the rest of the year and that stock price volatility drops compared to October. And it’s just as good to know that come next fall again, a Halloween surprise may await.