Why October Is Wall Street’s “Crash Month”

As the calendar transitions into October, it triggers nervousness among stock investors with memories of past stock market crashes in this notorious month. October is infamous for historic market panics, including the 1929 Wall Street crash, the 1987 Black Monday, the 1989 Friday 13th mini-crash, the 1997 October sell-off triggered by the Asian economic crisis, and the 2008 financial crisis. However, while October may have a haunting past, it doesn’t guarantee that investors will be spooked into selling. Nonetheless, preparedness is key.

Why is October notorious? There are various theories, including cash flows and quarterly window dressing. The most compelling explanations, however, revolve around the calendar itself. October marks a time when investors have to start paying attention as they have less room for hypothetical scenarios. This month represents the last opportunity to make adjustments before various events like elections, late-year Fed meetings, or the performance clock running out on December 31. Is the 2016 stock market susceptible to a correction, crash, or even a bear market? Some experts suggest the potential for a correction, defined as a decline of at least 10%. Factors contributing to this vulnerability include valuation and shifts in central bank policy. The current bull market is also aging in historical terms, having lasted over seven years and being larger in magnitude compared to the average expansion. Expansions typically end due to recessions or external shocks, but neither seems highly probable in the next 18 months.

Several risks could trigger a stock market correction:

1. Banking system: Concerns about Deutsche Bank’s activities and potential systemic risk could lead to market jitters.
2. Presidential election: While the market currently expects a Hillary Clinton victory, any unexpected outcome could cause a selloff.
3. Unexpected geopolitical or economic risk: Identifying a specific catalyst for a correction is challenging, but such risks are always present.

Investors can learn valuable lessons from October’s turbulent history. Every October sell-off eventually became a buying opportunity, with capital destroyed in previous crashes being restored within months. The key is to control emotions, reactions, and actions during market dips. Great stocks become available at discounted prices when markets overreact to the downside. As Warren Buffett famously said, “Be fearful when others are greedy, and be greedy when others are fearful.” When seeking bargains during market declines, avoid stocks directly exposed to fear factors. Create an investment plan aligned with your objectives and risk tolerance, commit to it, and remain patient during periods of market volatility. Long-term investors often reap significant gains when they least expect it. In summary, while October’s history may be haunted by market crashes, prepared and rational investors can navigate these turbulent times and seize opportunities when others panic.

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