October is the cruelest month for stocks. As mid October approached, the Financial Times declared that global stock markets were headed for the worst week in six months.
Nerdwallet points out that five of the stock market’s worst 10 days ever happened in October.
Poor October. The Bank Panic of 1907? An October baby. The 1929 crash that augured the Great Depression happened in October. That was called Black Tuesday. There was a Black Monday in October of 1987. That time the Dow dumped 22% of its value in a single day.
It’s true that markets have misbehaved badly during the tenth month so many times in the past that investors always brace themselves for disasters as Halloween approaches.
The October effect might be delusional, however.
Certainly the latest sell-off is minor.
Are We Reeling Yet?
To put everything in perspective, the horrible state of the major US indexes as of Oct. 11, when warnings sounded from just about every financial media on the planet, wasn’t really very horrible. The lows only slightly exceeded a dip in June. The indexes were actually higher even after that correction than they were in March and April.
But October… people worry. Should we?
If you are the odd investor who only feels safe when stocks go up every day, you absolutely should worry. Not because it’s October, but because your expectations don’t match reality.
For the rest of us, things look fairly normal. And there are plenty of reasons for the stock market to wobble without meaning it’s about to crash.
For one thing, we are now days from midterm elections in the US, and they have dynamite potential. Unless something completely unexpected happens, Republican control of the House of Representatives will likely implode. The Senate is probably safe for Republicans, but not safe enough for GOP-ers to breathe easy.
Political uncertainty like this always unsettles the stock market. Investors as a group tend to want Republicans in control. The irony is that stock markets tend to do best under Democratic presidents.
Surprising right? But from Herbert Hoover (1929) through Barack Obama (2016), the S&P 500 has averaged 1.71% per year under Republicans and 10.8% under Democrats. When you consider that most of the Great Depression coincided with FDR, a Democrat, in the White House that’s quite a feat.
Anyway, for at least the next two years, the White House remains Republican. The good news is that the market does better when a Republican president is matched with a Democratic house. And it does even better when Congress is split.
So, relax about the election.
But the Feds!
The other oft blamed reason for the October rumble this year is the Federal Reserve.
Uncertainty makes the stock market nervous. So does a change of direction. Which is why the prospect of the Federal Reserve raising rates more aggressively has caused such a reaction.
To ramp up the jitters, President Trump swears the Federal Reserve has gone crazy. Yep, that helped calm everyone down, all right.
But since Trump has taken full credit for the stock market’s gains since 2016, he wants to be sure no one thinks the falling market had anything to do with him.
The Federal Reserve meanwhile, has not gone crazy. But it has observed the world without donning rose-colored glasses. Unemployment is lower than expected. GDP growth has been stronger than expected. Inflation is on track.
That adds up to an attitude adjustment by our central bankers. An economy that is strong and getting stronger brings a faint whiff of inflation with it. The Fed is definitely biased against inflation. Always.
Fed Chairman Jerome Powell has already confessed the central bank attitude is “far from neutral.” Lest that was unclear, Chicago Reserve Bank president Charles Evans is firm that the Fed must continue raising rates.
It should be remembered that the Fed has been raising rates gently since 2015 and stocks have soared all the while.
So, that’s another worry about which we can all relax. And just to be safe, you can follow Will Rogers advice: “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”
Or just wait until October is over.