October Market Crashes - Thoughts on Market #021
Bad Seasonality or Just Coincidence
Everybody loves Charts!
Every so often, I’ll check in to show items floating around Wall Street circles and blogs.
Longer term trends in the markets and economy.
Extra details on what seems underappreciated or overhyped.
Link to some great explainers on the concepts.
**Everything as of 9/12/2024
Welcome to October! Shocktober? Rocktober? Some other bad pun for October being volatile?
The most famous Historic Stock Market Crashes have all occurred in the September/October timeframe. With a measly n=4 for famous market crashes though, it’s tough to say if this is a real phenomena, Trader PTSD or just coincidence. Perhaps it was a thing once but modern arbitrage killed it?
Let’s take a look -
First, a micro summary of the agreed upon cause behind each October crash.
Panic of 1907 (October 14 1907)
You don’t remember the Knickerbocker Crisis? A failed attempt to corner the market on United Copper shares led to a series of bank runs. As trust in banks eroded, the stock market crashed 50% causing J.P. Morgan (the man) to step in and orchestrate a rescue effort. The crisis ultimately led to the creation of the Federal Reserve in 1913 to provide stability and oversight to the U.S. financial system.
Black Thursday (October 24 1929)
A combination of speculative stock buying and excessive use of margin made stock prices soar throughout the 1920s until concerns over declining economic growth and rising interest rates triggered fear. When large investors started selling off their stocks, it sparked widespread panic, leading to a massive sell-off that marked the beginning of the crash and Great Depression.
Black Monday (October 19 1987)
Growing economic uncertainty from rising inflation, fears of higher interest rates, and a weakening U.S. dollar began creating skepticism of high stock valuations. When markets began to decline First-Generation automated trading programs triggered a cascade of sell orders, causing the Dow Jones to plummet by over 22% in a single day.
Great Financial Crisis (October 2008)
Banks packaged risky loans into complex financial instruments, which spread instability across global financial markets when homeowners began defaulting. The failure of major financial institutions such as Lehman Brothers and a freeze in credit markets led to a severe economic downturn and government intervention to stabilize the system.
October Effect
So are market crashes in October a real thing to worry about or just a myth based on crashes of the past? Turns out The October effect is a real trader heuristic invoked to raise caution but statistically, it does not hold up.
While volatility does move higher into the Fall, on average, price direction is just as distributed as any other month.
So why does the idea linger?
My own thoughts on why October seasonal sentiment shifts dramatically-
Labor Day weekend marks the end of a lazy August and a return to an aggressive posture and positioning of portfolios into year end.
The Federal Reserve’s annual Jackson Hole Summit in late August creates an extra stir of the economic pot where policy pivots or reiterations often occur
Every 2 years we have elections in early November creating a rise in anxiety and uncertainty in the weeks preceding election day.
Quarterly/Annual portfolio rebalancing for tax purposes and legal rules pop up on everyone’s Outlook reminder starting Q4 (October 1st)
So after a lazy August I think everyone wakes up in September, looks around and reads the tea leaves of changing policy. They make a plan to either lock in gains or re-position themselves into year-end to shore up their situation. Four times in the past 100 years, its gone terribly wrong resulting in a crash so now everyone holds their breath in case it happens again.
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Thoughts? Questions? Comments?
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