Will the Market Crash Again This October?

by Dan Wiener | September 19, 2011 12:01 am

Just a little over three years ago, Lehman Brothers[1] filed for bankruptcy protection. The Dow fell 4.4% that day, to 10,917.51, not far from where we are today. The S&P 500 fell even more; 4.6% on the day. Volatility spiked, and the VIX went over 30.

Little did you and I know then what we know now: that the VIX would get up into the 80s, and the market would fall another 40% over the next six months.

A lot has changed since then, but a lot remains the same. We still have a debt crisis on our hands, only now it’s centered in Europe, with Greece the whipping boy. We still have big banks under pressure, only now it’s not U.S. banks but French banks. At home, the housing crisis is still a crisis. Unemployment, which was 6.1% nationally in September 2008, now runs at 9.1%. At the same time, we should be thankful for just about every job we see created right now. During the last four months of 2008, the economy lost an average of 591,000 jobs a month. As small as it sometimes is, the private sector has been creating jobs every month since March 2010.

Another thing that hasn’t changed: investor behavior. Investors continue to do themselves a disservice by trying to time the market and, even more importantly, letting their emotions drive their investment decisions. Since the market lows in March of 2009, investors have pulled nearly $170 billion out of domestic stock funds and added over $650 billion to fixed-income funds.

Since the market bottom, U.S. stocks are up 70% while the bond market is up only 20%. I wouldn’t call that a case of good market timing, would you?

One more comment on investor timing and money flows: Over the past three months investors have pulled $46 billion out of domestic stock funds. There have only been two other three-month periods when investors have pulled this much money from U.S. stock funds: March 2009 and August 2010. Both times marked an inflection point before a stock market rally.

So, the more things change, the more they really do stay the same. Let us hope that in October, things change for the better rather than succumb to October’s somber history.

October Omens

October’s coming, so be prepared for all the dire warnings that herald its arrival.

You remember October, don’t you? In 1987 we had the great crash that took the Dow down 508 points (or 22.6%) on what has come to be known as Black Monday. That put a fire under the popular notion that Octobers were bad for your health, and stock portfolio.

Of course, the minute everyone agreed that Octobers were to be avoided, well, they weren’t so bad, with positive returns in about twice as many Octobers as negative returns.

Then, of course, there was October 2008. Following on the Lehman Bros. bankruptcy a month earlier, the credit markets seized up, the Fed slashed interest rates, TARP was unveiled and the stock market dove 17.6%, the single worst month of the entire 2008 to 2009 bear market.

I’ve got some good news and some bad news on October. The good news is that October isn’t the worst month of the year for investors. The bad news is that the worst month is the one we’re in right now — September.

Since 1987, on average, 500 Index has actually gained 1.1% during October. By contrast, the fund has generated only a fractional gain, on average, during September.

Does that mean we should sell everything today and buy it back in November? Absolutely not. I’m not a market-timer, and you shouldn’t be, either. Market-timing costs you money (taxes), wasted energy, anxiety and pain — and the occasional redemption fee. And you never know when you’ll have a September or October like we did last year, when the average fund gained more than 12% over the two-month period (500 Index gained over 13%).

So remember, in the next few weeks you’re going to be hearing plenty about how terrible October will be for investors. Armed with the statistics I’ve just laid out, you may sleep a bit better at night. I know I will.

  1. Lehman Brothers: https://investorplace.com/2011/09/3-years-after-lehman-weve-learned-nothing/

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