FINANCIAL PLANNING & COACHING FOR THE OVER-TAXED
Should You Be Spooked by the October Effect?
GHOSTS OF OCTOBERS PAST
J.P. Morgan-led group, the Panic of 1907 remained just that. BLACK TUESDAY, THURSDAY, AND MONDAY, OCTOBER 1929 The economy wasn’t so lucky 22 years later. Because so many more people were involved in the stock market by 1929, this crash was especially devastating. It left several “black” days in the history books, each with their own record-breaking money losses. BLACK MONDAY, OCTOBER 1987 Nothing says Monday like a financial meltdown. Black Monday began in Hong Kong and spread west into Europe, hitting the U.S. after other markets had already rapidly declined. Automatic stop-loss orders were blamed for the Dow’s 22 percent drop. Fortunately, the Fed and other central banks intervened, and the market recovered from the drop pretty rapidly.
More importantly, the catalysts for both the 1907 panic and the 1929 crash took place in September, with the events simply hitting in October. Rather than being a statistically sound phenomenon, the so-called October Effect is more of a psychological expectation. Historically, the majority of investors have lived through more bad Septembers than Octobers. But the real point is that financial events don’t cluster at any given point. The worst events of the 2008 financial meltdown happened in the spring, and stocks tend to fall more in November and December due to year- end rebalancing. Although it’d be easier if financial panics and crashes were that predictable, October is no more prone to bad times than any other month in the calendar. So don’t panic based on a few trends, and save the scream for your kid’s Halloween costume. -Nikki Ea rley
OCTOBER IS A UNIQUE MONTH. In the West, it’s a transitional time with autumn sliding relentlessly toward winter. It also boasts the only holiday where people are encouraged to dress up, scare each other, and extort candy with threats of mischief. In the finance world, October is scary for another reason — the October Effect. It’s one of the most feared months of the financial calendar. But is this bad rap really justified? The following are some of the events that help give October a bad reputation: THE PANIC OF 1907, OCTOBER 1907 Threats of legislative action against trusts and shrinking credit created a financial panic that threatened to overwhelm Wall Street. Multiple bank runs and heavy panic caused frenzied selling at the stock exchange. All that stood between the U.S. and a serious crash was one financier who did the work of the Fed before the Fed even existed. Thanks to a
Oddly enough, September has actually had more downed markets than October.
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