Topline: The stock market’s rough beginning to the month has some investors recalling other awful Octobers in the past—but history suggests there may not be a reason to panic yet.
- October is known for huge market crashes—Black Tuesday in 1929, Black Monday in 1987 and the start of the financial crisis in 2008.
- The major indexes have plunged during the first two days of October: Since Tuesday, both the Dow Jones Industrial Average and S&P 500 tanked over 3%. The rough start to the month has already wiped out both indexes’ gains for September, not to mention for the entire third quarter.
- In recent decades, however, October hasn’t been scary at all: “The good news, though, is while October has had a bad rap for some big drops, over the past 20 years, it actually has been the third best month of the year for stocks,” says Ryan Detrick, senior market strategist for LPL Financial.
- Still, October’s sudden volatility could prove worrisome, since September was so calm (the S&P 500 didn’t fall 1% on a single day last month). “The lack of any volatility in September could mean the usually volatile month of October could be due for some big swings,” Detrick describes.
Key background: With the S&P 500 at just over 17% gains for the year, investors are starting to become more cautious as they worry that the bull market is running on fumes. Lack of progress on a trade deal continues to dominate the headlines, while at the same time economic growth is slowing, leaving investors to grapple with fears of a recession.
Crucial quote: This “October Effect” is just a “market anomaly” that has more to do with investor behavior than the fundamentals of the stock market, says Carter Henderson, portfolio specialist and director of institutional development at Fort Pitt Capital Group. “As we saw last year, even the slightest bit of volatility can cause overreactions in the market.”
What to watch for: If negative headlines—especially about trade or the economy—continue, the market could be in for more of a sell-off, says Edward Moya, senior market analyst at OANDA. “We can definitely expect more volatility in October than we’ve seen in the last few months.”