Stock investors aren’t typically the superstitious type, but a few points of troubling historical data, combined with our current economic predicaments, could have even the most optimistic investors worried.
Heading into fall, economists and investors shared concerns that an economic collapse (or at least a correction) was on the horizon. We’re currently just past the 10-year mark of what may be the longest bull market in history. Economists have been anticipating some kind of corrective action for many months (in some cases, years) due to sky-high prices and political turmoil throughout the world. Thanks to unrest in Hong Kong, trade war fears, and a transfer of power in various countries, commentators speculated that September could be a terrible month for stocks.
Instead, we were met with the opposite. As of September 30, the Dow Jones Industrial Average had gained 2.1 percent, and the S&P 500 Index had grown about 1.8 percent. It was a bullish month, but it’s wrapped up — and now, investors are worrying that the worst may be right around the corner.
October: A Cursed Month
October is known for its affiliation with some strikingly negative economic events. The Wall Street Crash of 1929, which led to the Great Depression, happened October 24. Though the economic crisis that led to the Great Recession had roots dating back to 2007, the greatest effects of the recession set in during October 2008. The stock market crash of 1987 also happened in October.
This likely isn’t a product of October being an “unlucky” month for stocks, but it’s also not a pure statistical anomaly. Some statistical analyses suggest the so-called “October Effect” is just a psychological phenomenon. Still, there are reasons why October could be a down month for stocks in general. First, it’s a connective month that leads us from summer to fall, a time when production and consumer spending tend to decline (at least until the holiday shopping season). Accordingly, it may also produce investor sentiments like pessimism; these, in turn, drive market forces. It’s also a month before major elections in the United States. Election seasons tend to produce uncertainty, which can drive stock prices temporarily lower or at least result in volatility.
More likely, the perception of October being a bad month for stocks is a self-fulfilling prophecy. If enough investors and economists are wary that October could be a bad month for stocks, they’ll be inclined to sell heavily in the first couple of weeks. If the selloff is large enough, it could have an impact in reducing prices, which could stoke more fears, resulting in even more selling.
In other words, there may be some factors making October a troublesome month for stocks, but any real effects will likely be attributable to investor sentiment and reactionary trading.
This year, we have some complicating factors in the mix that could result in economic turmoil:
- An “impending” impeachment: Currently, President Donald Trump is facing an impeachment inquiry from the House of Representatives. Already a controversial and economically volatile president, the impeachment investigations against Trump have sparked waves of fear, confusion, and instability among segments of the population. Depending on how the investigation goes — and how Trump responds — it could result in further volatility.
- Trade war purgatory: Though economic tensions between China and the United States have cooled from their peak earlier this summer, the possibility of a trade war hasn’t completely subsided. It wouldn’t take much for a full-blown international economic conflict to erupt; if it does, it would be ruinous for pretty much everyone.
- Monetary easing: Many developed countries around the world have adopted monetary easing policies, sharply reducing interest rates in an attempt to stimulate lending and consumer confidence while reducing inflation rates. However, this can also produce negative effects, especially when they’re cut drastically or cut for extended periods of time. Interest rates in the United States have been very low since the 2008 economic crisis, which could be a sign of trouble in the future.
The Bottom Line
October has been a common ground for multiple stock market crashes, recessions, and even the Great Depression, though fears of its bearishness are largely driven by consumer superstition. Still, the effects of consumer superstition are very real; if enough investors are afraid of volatility or an outright crash, it could force prices to significantly drop.
Standing fears of a forthcoming recession continue to loom over an otherwise healthy-seeming market, and complicating political factors may end up serving as the inciting force necessary to make these fears snowball. Otherwise, October may end up like September — starting with fears of a decline and ending with a sizable increase.