Today, we officially start the danger zone for investors with the biggest risk of crash out of all periods across the trading calendar.
Welcome to October, the most frightening month for stocks.
October welcomed the 1929 crash that brutalized the nation on the eve of the Great Depression. The gut-wrenching 1987 ‘Black Monday’ crash also occurred in October, and of course, we saw a decline of more than 18% across the 10th month during the 2008 financial crisis.
If you care about market history, you care about October.
But does that mean you should sell out of your stocks now, before this spooky month guts investors yet again?
Maybe. If you’re a swing trader, it’s undeniable that we are seeing some froth right now. Price-to-earnings ratios are back up to fair values at best and at overvalued levels at worst — and as Henry Blodget points out, these valuations are unsustainable unless the current trend of cost-cutting to prop up earnings is actually replaced by organic sales and profit growth.
Furthermore, there’s a lot to be said for the market taking a much-needed rest. Stocks are up about 18% so far this year, and it’s a tall order for equities to keep this up for much longer. Even if the bull market is here to stay and fears of a crash are overdone, there might be some validity to a short-term pullback simply for things to cool off before the end of the year.
Of course, market timing has been proven to be a fool’s errand time and time again. Passive management, buy-and-hold for the long-term and compound returns with dividends are proven winners in any market environment, and those who inaccurately pull out their investments can miss out on big gains — then plow their cash in after a break at the worst possible time.
So keep in mind this broader context as we enter October. Long-term investors shouldn’t really sweat the seasonality, and even short-term traders might be better served by being patient than being reactionary.
- Of course, the same crap was said about September … (Barron’s)
- October: Into the wild. (The Reformed Broker)
- Of course, maybe we won’t see a crash — just heavy volatility. (InvestorPlace.com)
- Beyond just monthly trends: Day-of-the-month seasonality for October. (MarketSci Blog)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.