October Surprise: Stock Market Not Always So Spooky

Oct. 9, 2009— -- For sports fans, the month of October means the World Series. Kids equate it with Halloween. For Starbucks junkies, it's the return of pumpkin-spice lattes.

But for stock market investors, October has been notoriously synonymous with their worst fears: crashes. The most infamous and steepest stock market value declines -- "Black Friday" in 1929, "Black Monday" in 1987 and "Black Week" in 2008, when the Dow Jones industrial average lost 22 percent in eight consecutive sessions -- all happened in October. In 1989, a lesser-known, "mini crash" took place October 13, another "mini-crash" occurred in October 1997.

Stories and theories on what may be behind seemingly spooky October market conditions tend to circulate this time of year, with investors, traders, experts and academics weighing in. Usually, much of the analysis comes down to logical speculation or outright dismissal of the correlation.

For example, Washington University economics professor Stephen Williamson earlier this month put forth his "Spurious Correlation Theory," which more or less asserts that putting credence in the widespread notion about October spelling doom for stocks is no more rational than tying the likelihood of extended periods of wintry weather to ceremonies involving celebrated groundhogs.

To get some handle on whether there is any statistical basis for October being a scary month for stocks, researchers at MarketHistory.com crunched more than a century's worth of aggregated DJIA index return data for each month. Their conclusion: that September, not October, is actually the single worst month for stocks, at least on average, over the long term.

In September, the Dow has produced, on average, a decline of -1.18 percent. Octobers, on the other hand, have been slightly bullish, producing an average return of 0.2 percent. February is the only other month that over time has produced an average negative (-0.3) return. December, incidentally, has been the single best month for stocks, with an average return of 1.39 percent.

Gibbons Burke, director of research at MarketHistory.com, does point out, however, that October seems to have an above average tendency to produce significant declines, which he defined as a loss of 10 percent or more.

MarketHistory.com research uncovered 47 instances in which the Dow had monthly drops exceeding 10 percent. Eight times, or 17 percent of the time, those declines took place in October. "So October has more than twice as many outsize drops as would be expected, assuming all months were equal," Burke explains, adding that only the month of September (8) is on par with October in terms of such drops.

Drawing conclusions about October and crashes isn't a stretch, insists market strategist Jim Delaney. "It all goes back to our country's agrarian roots," says Delaney, whose firm, Market Strategies Management in Township of Washington, N.J., produces market research for institutional investors, mutual fund managers and hedge fund firms. "Farmers went to the bank twice a year. First, in the spring, to borrow money to pay for their planting cycle, and again in the fall, to pay it back. After a poor harvest, that period could bring bad news for farmers, and the bankers. I think a general sense of seasonal wariness has become engrained in our collective psyche, even as we moved from agrarian to industrial and now to a service economy."

October, in other words, is a time to invoke caution, Delaney says.

But most personal finance experts warn individuals against making any meaningful moves in their stock portfolios purely based on what the calendar says.

"Even if you buy into the theory that October is prone to market crashes, it's highly unwise to try to time the market," notes Darrell Pennington, a financial planner at Houston-based Tiras, Pennington and Associates, which is affiliated with Ameriprise Financial, and which has $1.5 billion in client assets under advisory. "We urge people to stay diversified and not to try to time exits or entrances into the market, for any reason, no matter what month it is."