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Brace Yourselves, Traders and Investors: October Is Crash Month

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October 10, 2016
Scary spider: October can bring market pullbacks as well as Halloween spooky stuff.

Don't look now, but it's October. You've undoubtedly been hearing the talking heads on financial news shows recapping the market horrors and ghosts of Octobers past. The month of October indeed gets a bad rap, but there's good reason. Notoriously, October is home to some of the worst market declines in stock market history, including:

  • Wall Street Crash, October 1929—led to the Great Depression
  • Black Monday, October 1987—22.61% drop in the DJIA
  • Friday 13th mini-crash, October 1989—triggered by failed leverage buyout of United Airlines
  • October 1997—mini crash triggered by Asian economic crisis
  • October 2000—market turned down definitively as bear market began after dot.com bubble peak in March 2000
  • September–October 2008—Global Financial Crisis began, Lehman Brothers bankruptcy, led to Great Recession

But consider this perspective: Throughout history, the U.S. equity markets have undergone periods of secular bulls (most notably the massive bull cycle that propelled stocks higher from the early 1990s into the March 2000 high), secular bears, and long periods of sideways action. At the end of the day, though, the very long-term trend remains up. Dips, corrections, and bear markets have ultimately reversed higher.

  • In 1974, the S&P 500 hit a yearly low at 62.28. Today it trades around 2150.
  • In 1987, the Dow Jones Industrial Average (DJIA) hit a high at 2746.70 before crashing to a low at 1616.20 in the October sell-off. Today, the DJIA trades around 18,231.

Most of these "crashes" turned out to be good buying opportunities for those who could stomach entering the market during panicked times. Jeff Hirsch, editor of The Stock Trader's Almanac, calls October a "bear killer" and notes that the month turned the tide in 12 post-WWII bear markets. In fact, October is the end of the so-called "worst six months" for stocks. October ends the "sell in May and go away" period.

So, what is an investor to do if a stock market correction emerges?

Strategies to Keep Your Cool During a Market Pullback

We've all heard the saying "buy low, sell high," but mom-and-pop investors have a tendency to panic during market declines and sell low. In order to avoid becoming a casualty of the herd mentality and selling at the wrong time, consider these three strategies to keep your cool in a declining stock market environment. Emotional trading can lead to mistakes that can have long-term consequences for your investment plans.

1. Stick with your long-term plan and turn off the news. As history and the numbers show, many corrections end quickly. Don't get caught up in the squiggles on the chart.

2. Make your shopping list now. It's always good to have a wish list of stocks that you'd like to pick up at a cheaper price. Pullbacks can offer buying opportunities for the well-prepared investor.

3. Manage your emotions. It’s virtually impossible to erase fear, panic, and greed, especially when it comes to money. One strategy is to avoid obsessively checking portfolios with a long-term investing time horizon during a market pullback. It helps to have a written plan that you can refer to during times of market crisis—something that can help you manage your emotions and keep a level head.

Take heart. Although October has offered up some rocky times in markets past, the "best six months" of stock market action—November through April—are just around the corner. 

Keep Current: The Market Update

Check out the Market Update every morning for fresh insights from JJ Kinahan. Get trading news, analysis, and tips to start the day right. 

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