October is a month that evokes mixed feelings in the world of finance. Known both for its notorious historical market crashes and as a potential harbinger of recovery, October plays a unique role in the cyclical nature of global stock markets. In today’s article, we look to understand the duality of this month through consideration of historical events, investor sentiment, and the investment stigma that surrounds it.
October is perhaps best remembered for several infamous market crashes. The most notable is the stock market crash of 1929, which marked the beginning of the Great Depression. On October 24, known as Black Thursday, the market plummeted, leading to widespread panic and a significant loss of wealth. Fast forward to 1987, and we saw another catastrophic event, known as Black Monday, where the Dow Jones Industrial Average (DJIA)dropped 22.6% in a single day. Similarly, the Australian market lost around 25% of its value that day and 41% of its value by the end of October. These historic events have ingrained a certain stigma around October, leading many investors to approach the month with caution.
In addition to these significant crashes, October has also seen notable volatility. The fear and uncertainty surrounding the month often leads to heightened investor anxiety, which can amplify market fluctuations. As seasoned traders recall past crashes, they may be more prone to react impulsively to negative news, further feeding into the month’s bearish reputation.
Conversely, October also holds a reputation for potential recovery and opportunity, as some investors view it as a time to reposition their portfolios, anticipating a rally into year-end. Historically, markets often rebound in the latter half of the month, leading to a phenomenon known as the ‘October Effect’, where positive investor sentiment can counteract earlier declines.
Furthermore, October hosts the earnings season for many US companies, providing critical insights into their performance and outlook. Strong earnings reports can invigorate investor sentiment and lead to upward momentum in the market, contrasting sharply with the historical narratives of doom.
This year, despite the S&P500 and DJIA recently hitting all-time highs, investors are the most bullish in four years according to the Bank of America Global Fund Manager Survey for October, with 74% also believing the US will avoid a recession. As the old adage goes, “When the US sneezes, the world catches a cold”.
That said, the investment stigma surrounding October cannot be ignored. Many investors carry the psychological baggage of past market crashes, which can lead to a self-fulfilling prophecy. When enough investors anticipate a downturn, their actions can trigger sell-offs, reinforcing the notion that October is a bad month for investing.
This sentiment is particularly prevalent among retail investors who may be more influenced by emotional responses. Institutional investors, on the other hand, are typically less motivated by emotional based influences and may be more inclined to view October as a time for strategic buying, leveraging the value opportunities presented by lower prices after a market correction.
October is evidently a month characterised by both caution and opportunity. The historical backdrop of significant market crashes contributes to an ingrained stigma, shaping investor sentiment and behaviour. Yet, October also offers the potential for recovery, especially as companies report earnings and the market prepares for year-end adjustments. For investors, navigating this month requires a balance between historical awareness and a rational assessment of current market conditions. While October may carry its share of risks, it can also present unique opportunities for those willing to look beyond the shadow of the past.
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