Surprise! Despite its "Black" Reputation, October Isn't the Worst Month for Stocks.

By Jennifer Yousfi
Managing Editor

Fresh off one of the most-volatile months ever for U.S. stocks, investors can't be happy that they're facing another October - the poster child for U.S. stock market crashes.

Thanks to the stock market crashes of 1929 and 1987, October has a reputation for being a horrible month for stocks. But once you dig into the data, you find that October's reputation as the "jinx month" might just be undeserved.

While it's true that some of the most spectacular crashes in history have occurred in October, the reality is that it's September that has the worst track record of all for stock-market performance.

Indeed, since 1950, September has been the worst performing month on a percentage basis for all three major U.S. indices - the Dow Jones Industrial Average, the Standard & Poor's 500 Index and the Nasdaq Composite Index.

As you no doubt know, September 2008 was a particularly harsh example of this general rule:

  • The Dow shed 911.28 points over the course of September, a decline of 7.9%. On Sept. 29, the Dow incurred in its largest daily point loss to date, plunging 777.68 points.
  • The S&P 500 fared even worse for the month, plunging 11.2% with a 143.22-point loss.
  • And the Nasdaq was crushed last month with a 14.0% decline as it lost 332.34 points.

Over the past 57 years, the blue-chip Dow, known worldwide as a bellwether indicator of overall U.S. economic health, has experienced a loss 63% of the time in September versus just 42% in October.

The bottom line: Over time - despite its reputation - October is actually more likely to mean a gain for your portfolio than it is a loss.

And that's not all. Since 1950, the Dow's average gain for the month of October is 0.6%. But September leaves investors deep in the red. During that same period, the average return for the month of September is actually a negative 1.0%.

Infamous Octobers

So why does October have such a lousy reputation? After all, more than half of the time since 1950, October has been a boon for investors. But the answer is really simple: When markets crash in October, they do so with gusto. And this fourth quarter is already off to rocky start.

For the first two days of this month, the Dow is down 367.81 points, a decline of 3.4%, to close at 10,482.85 - its lowest level since June 2005. The tech-laden Nasdaq Composite shed 115.16 points, a decline of 5.5% to close at 1,976.72. And the broad-based S&P 500 dropped 50.46 points, a decline of 4.3%, to close at 1,114.28.

If you look at a list of the 20 largest one-day percentage losses for the Dow, eight of those downer days were in October. No other month shows up more often.

On a point basis, four of the biggest single-day losses occurred in October. In that category, however, October comes in second place - to September - which now boasts six of the biggest-single-day point losses, thanks to its record-setting 778-point plunge earlier this week.

But those are just numbers. And October's stock-market infamy grows out of its association with some of the notable "Black" days of the market. Here are some of the worst:

  • In October of 1929, the Wall Street Crash of 1929 kicked off one of the darkest periods in U.S. history, the Great Depression, which would last until the onset of World War II-fueled economic surge that began in 1939. The first such drop occurred on "Black Thursday," Oct. 24, 1929. But it would be the following Monday and Tuesday, which came to be known by their own "Black" monikers, that would kick off widespread market panic with their back-to-back, double-digit drops in the Dow.
  • In October 1987, another "Black Monday" would occur, when the Dow dropped more than 500 points and lost 22.6% that Oct. 19. The crash began with the Hong Kong market and quickly sped West. The causes of the 1987 crash are a cause for debate, and some have actually labeled it as a "black swan" event - hard to explain and beyond the realm of normal explanation. Just one week later, the month of October would add another nasty-trading-day notch to its belt. On Monday, Oct. 26, the Dow dropped 156.83 points, an 8.0% decline that still ranks in the Top 10 of daily percentage-point losses.
  • Twenty years after the 1987 Black Monday - to the very day (Oct. 19, 2007) - worries about the growing subprime mortgage crisis would send the Dow nose-diving again. Concerns over the number of write-downs and losses at financial firms, a weak dollar and oil prices that punched through the $90 a barrel level (which at the time was a record-high for the black gold), would send the Dow down 366.94 points, a loss of 2.6%.

Bleak October Outlook?

Clearly, despite September's record as the worst overall performer, it is October's uncanny ability to post huge, headline-grabbing declines that has branded the month as "Black October." And with the current rocky state of the financial markets, a banking sector in desperate need of help, and a government that can't seem to reach a meaningful consensus, it's far too soon to predict safe sailing through October 2008. 

"Statistically speaking, Octobers are no different from any other month," says Money Morning Investment Director Keith Fitz-Gerald. "What makes them really volatile is that many companies begin their fourth and final annual quarterly reporting period, so the pressure is on for both returns and the games analysts play with guidance."

Said Fitz-Gerald: "[October's] reputation as a jinx month is well deserved but probably coincidental [since the bottom line is that] earnings rule."

The third-quarter 2008 earnings season will kick off in the next week or so and the outlook is far from rosy. Analysts have been lowering earnings estimates across the board. And since its profits that matter, this isn't bullish.

"Over the last four weeks, analysts have lowered forecasts for 712 companies in the S&P 1500 and raised forecasts for only 264," Bespoke Investment Group said in a recent research report. "On a net basis, analysts have lowered forecasts for 29.9% of the stocks in the index."

The hardest-hit sectors are energy, financials, and technology as analysts predict that the ongoing credit crunch and waning consumer demand will hit these industries the hardest.

And with such a bleak outlook for third-quarter corporate earnings, it seems October 2008 could easily earn its place on the list of infamous Octobers.

News and Related Story Links: