Superstition stalks the market

Halloween could be the least scary thing about October

By BBC2 Working Lunch's Paul Whitfield

Perhaps it's the gathering darkness, newly barren fields or the approach of All Hallow's Eve. Whatever the reason, October is a month for superstitions.

And the stock market is no different.

Among market folk, October has a reputation as a bad penny.

Traders, analysts and fund managers talk of something called the "October effect": a superstition based on the idea that just entering the month of October is bad news for investors.

Notorious

The superstition does have some grounding in fact, both present and historical.

For capitalists October has been a bad month since way back in 1917, when Russia's provisional government was swept out of the Kremlin by the Bolsheviks.

A dozen years later, in the last few days of October 1929, the stock market suffered its first ever crash.

About 30% of the value of US markets disappeared in just three days, and the world was sent spiralling into the Great Depression.

Black Monday

All this wouldn't have been enough to cement October's infamy among modern markets if not for the events of 19 October, 1987.

October's Hall of Shame

1917: Bolshevik Revolution

1929: stock market crash leads to depression

1987: Black Monday crash

1997: Asian Currency Crisis

1998: Russian Loan Crisis and LTCM near collapse

2000: FTSE falls more than 2% on two occasions

2001:Railtrack collapse

On that day, known as Black Monday, markets both here and in the US were crushed by a mixture of panic and computer-programmed selling.

In two days the FTSE 100, which tracks the value of the UK's 100 largest companies, lost almost 20% of its value. The Dow Jones Industrial Average, which tracks America's 30 biggest companies, lost 22.6%.

Still not behaving

It might seem a stretch to blame our Octobers, the Octobers of the modern era, for those faraway woes.

Yet October hasn't behaved itself much better over the past four years.

October 1997 saw the worst excesses of the Asian currency and market crisis.

The following year it lumped us with the Russian loan crisis and the near bankruptcy of giant hedge fund Long Term Capital Management (LTCM).

In 1998, for almost no discernible reason beyond the "October effect", the markets suffered their biggest single week decline since 1987.

Then in 2000, October put paid to a late September rally. The FTSE 100 twice fell by more than 2% and then finished higher than it started: jittery indeed.

Poor performance

According to David Schwartz, a stock market historian, the October hoodoo also has statistical credence.

His research reveals that over the past 25 years, the six months from May to October have seen stock markets rise an average 0.3%.

In comparison, the six months from November to April have seen average rises of 15%.

Mr Schwartz says: "October does make people nervous and for good reason. It has been a rotten month for investors."

And now, as we edge nervously through yet another October, things seem to be little better: we have a war, and the ever-present threat of terrorist attacks to make the markets jumpy.

That October feeling

Millions of investors have already lost money in the Railtrack collapse and growing proof of a long-term economic slowdown is spreading more gloom.

Theories

Explanations for the October effect are many, varied and spurious.

Some blame the low volumes of shares traded during October. But this theory falls over when you look at August, a month that traditionally delivers the thinnest trading.

Yet statistically August is one of the best months for share performance.

Another theory is that dividends are paid by managed funds in November, so these institutions - which are the biggest single investors in the stock market - are cash-poor in October, meaning there is less money in the market.

I don't know why October seems to give investors a bloody nose so often: the truth is I don't think anyone on the planet knows the answer

Stock market Historian, David Schwartz

But the other big dividend month is May, which should mean that April is also a poor month for investment. In fact April is statistically the best month for investment - since 1975 markets have risen 80% of the time during April.

New Offers

Others believe that the traditional, post-summer, wave of new share offers takes money out of the market during October.

The theory is that big institutional investors earmark funds to buy these new shares so spend less on established shares.

This doesn't explain why October should bear the brunt of the poor performance: these share offers continue throughout November and early December.

Mr Schwartz says: "I don't know why October seems to give investors a bloody nose so often: the truth is I don't think anyone on the planet knows the answer.

"But there are certain rhythms to the stock market and when they repeat themselves often enough it doesn't make sense to ignore them even if you can't explain them."

Dubious honour

The good news for October is that statistically it is not the worst month of the year.

That dubious honour belongs to September.

A study, completed last year by US-based Chase Bank, found that over the past 30 years October had seen US markets close up 60% of the time.

Over the same period, according to Chase, September had closed up only 39% of the time.

And the good news is September has already passed.

No need to worry then...