October: Market Crash Month?

October is a unique month. In the west, October is a transitional month, as autumn slides mercilessly into winter. It also has the only festival that encourages people to dress up, intimidate each other, and threaten to blackmail sweets with pranks.

October has a special place in the financial world. It is called the October effect and is one of the most frightening months in the financial calendar. Let’s see if there is any value behind fear. The events that gave October a bad reputation spanned more than 100 years.

Key points

  • The October effect refers to a psychological expectation that a financial recession and stock market crash are more likely to occur this month than other months.
  • The bank panic of 1907, the stock market crash of 1929 and the Black Monday of 1987 all occurred in October.
  • However, historically, there were more falling markets in September than in October.
  • The psychological effect that caused some traders to attribute the stock market decline to October may actually make it one of the better buying opportunities for contrarian investors.

The Bank Panic of 1907

Financial panics threaten to sweep Wall Street, mainly due to legislative actions against trusts and the threat of shrinking credit. The panic began in October 1907 and lasted for six weeks.

During this period, the stock exchange experienced multiple bank runs and a large number of panic selling. Between the United States and the severe crash, only one consortium led by JP Morgan Chase completed the Fed’s work before the Fed existed.

The stock market crash of 1929

The 1929 crash—which began on October 24—was an unprecedented bloodletting because too many people invested money in the market. It has left several “black” days in the history books, and each day has its own record-breaking slides.

Black monday

Nothing speaks to Monday better than the financial crisis and unexpected stock market crash. October 19, 1987—historians now call it Black Monday—automatic stop-loss orders and financial contagion completely throttling the market because the domino effect reverberated all over the world. The Federal Reserve and other central banks intervened, and the Dow quickly rebounded from a 22% decline.

Take responsibility for September

Strangely, there were more historically down markets in September instead of October. More importantly, the catalyst that triggered the 1929 crash and the 1907 panic occurred in September or earlier, and the reaction was only delayed. In 1907, the panic occurred almost in March, and as the tensions surrounding the fate of the trust company increased, it could happen in almost any month. It can be said that the 1929 crash began when the Federal Reserve banned margin trading loans and raised interest rates in February.

On the whole, September’s impact on the market was worse than October. This is a very powerful argument, as you can see from the number of “black days” that occurred during the month.

The first “black days”

Most Americans associate Black Friday with the day after the Thanksgiving holiday, when retailers offer huge discounts and consumers start holiday shopping. But the original Black Friday, September 24, 1869, was not festive at all. Jay Gould and other speculators tried to monopolize the gold market, cooperating with an insider in the Ministry of Finance. The price kept rising until the Treasury broke out and sold $4 million in government gold. The price of gold fell by $25 in one day, triggering a catastrophic crash and destroying many speculators.

Black wednesday

Black Wednesday occurred on September 16, 1992, when George Soros attacked the pound sterling. This September incident is considered notorious by people outside the foreign exchange community. However, in the foreign exchange industry, it is revered as one of the greatest transactions ever. According to reports, Soros made a profit of 1 billion U.S. dollars from this transaction, but the British government lost billions of dollars to support his currency before finally surrendering.

September 2001 and 2008

The single-day decline of the Dow Jones Index in September 2001 and 2008 was greater than that of Black Monday in 1987. The former was due to the attack on the World Trade Center and the latter was due to the subprime mortgage crisis. The 2008 plunge was far beyond the scope of the U.S. economy, reducing $1.2 trillion from the global economy in one day.

Disguised angel

Surprisingly, historically, October heralded the end of more bear markets than the beginning. The fact that it is viewed negatively may actually make it one of the better buying opportunities for reverse traders. The landslides of 1987, 1990, 2001, and 2002 reversed in October and began to rebound for a long time. Especially Black Monday in 1987 was one of the great buying opportunities in the past 50 years.

Peter Lynch and others took this opportunity to acquire reliable companies that he had missed during the ascent. When the market recovered, many of these stocks soared to their previous valuations, while a few stocks far exceeded this level.

October effect is unreasonable

October has a bad reputation in the financial world, mainly because there are too many black days this month. This is a psychological impact, not any responsibility of October. Most investors experienced September that was worse than October, but the real problem is that financial events will not gather at any particular point in time.

The most serious event of the 2008-2009 financial crisis occurred in the spring when Lehman Brothers collapsed. Due to year-end rebalancing and tax optimization (for example, tax loss harvesting or charitable donations), stocks tend to fall in November and December, and some financially disruptive events are not given black sun status just because the media has no choice. Remove the nickname at that time.

Although it would be good to limit financial panics and stock market crashes to a particular month, October is not more prone to bad times than the other 11 months of the year.

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