How to Navigate High Volatility Stocks in the October Marketplace

Is October the spookiest month for stocks? Learn about the history of October volatility, plus things to consider in 2018, such as global economics, corporate earnings, and an election in the U.S.

5 min read

Key Takeaways

  • October’s reputation as a frightful month for the markets might be a bit of a bum rap
  • The Cboe Volatility Index (VIX) does show a higher historical reading in October
  • Global economics, earnings season, upcoming U.S. election may play a part this year

October stock market volatility may seem as much a part of the month as playoff baseball and trick-or-treating. Indeed, October has brought more than its share of volatile stocks and historic stock market selloffs. Mention “October 1987” to a veteran market professional, and there’s a good chance they’ll remember exactly where they were and what they were doing the day the Dow had its biggest percentage drop ever.

Still, October’s reputation as a frightful month for the markets might be a bit of a bum rap, some market pros say, and there are reasons why investors shouldn’t necessarily fear this time of year. Yet, it’s also important for investors to be mindful of factors that can produce high-volatility stocks late in the year and consider steps to protect themselves in case the markets go off on a wild ride.

A Brief History of October Stock Market Volatility

October’s track record includes several volatile stock market doozies, including the “Black Monday” crash of 1987, when the Dow Jones industrial average tumbled 22.6%, its largest ever single-day percentage-point decline. There’s also the Great Crash of 1929, which unfolded over the last few days of October that year and, according to historians, signaled the start of the Great Depression.

Other notable October market meltdowns include the “Friday the 13th” or “Black Friday” nosedive in 1989 and the 2008 financial crisis (fueled by the collapse of Lehman Brothers in mid-September that year).

How Do We Know October Tends to Bring Higher Volatility in Stocks?

October has been the most volatile month of the year for U.S. stocks by some measures. The Cboe Volatility Index, or VIX, averaged over 22 in October from 1990 through 2017, according to data from Cboe Global Markets. That’s the highest for any month and compares to readings around 18 for the lowest-volatility months, May through July.

More recently, the VIX, which is based on the implied volatility of options on the S&P 500 Index, has held near historically low levels, trading around 12 in early October.

October has also produced the worst average decline of any month in the S&P 500, at nearly 22%, according to Sam Stovall, chief investment strategist at CFRA. (October has also produced the best S&P 500 average performance of any month, at 16%, and the index ended the month with a gain 61% of the time, Stovall noted, citing data going back to 1945.)

Why Do October Markets Tend to Have Higher Volatility?

The reasons behind historically high market volatility in October involve timing and investor psychology, among other factors. October “sits at a precarious spot on the calendar,” says Jeff Hirsch, CEO and editor of the Stock Trader’s Almanac and Almanac Investor.

With the third quarter over and the fourth quarter underway, many money managers may step up buying or selling of certain assets with an aim to lock in the best possible performance by the end of the year.

This so-called window dressing “can create volatility, as portfolio managers sell losers to clear them off their statements, take some profits, and chase winners to have them in their reports to clients,” Hirsch says. Such activity, if exacerbated by other factors, “can instigate market calamities and can become a self-fulfilling prophecy,” Hirsch adds.

October’s historically high volatility may also reflect carryover selling from often-weak market performances in September, another historically volatile stock month, Stovall says. “Investors may be thinking that something worse will arrive in October,” he adds.

October can be a turnaround, inflection point for broad market trends—a “bear killer,” Hirsch says. According to Stovall, 5 of the previous 10 U.S. bear markets ended in October.

Any Reason to Be Wary of High Volatility in October?

As of early October 2018, the U.S. economy continues to expand, with unemployment near a 50-year low. Still, periods of volatility seem to be manifesting themselves.

What can go wrong? A lot of things, as history shows. Some risk factors worth watching this year include the U.S. mid-term elections in November, third-quarter earnings surprises, and further increases in U.S. interest rates, as well as Britain’s impending exit from the European Union and other geopolitical developments.

“The main risk is, we’ve had a lot of upside in the market,” Hirsch says, referring to U.S. stocks. “We’ve come a long way, and nothing seems to really keep the market down. Equity valuations are elevated, but they’re not ridiculous.”

With October, Hirsch adds, “There could be some sort of snowball effect that materializes from an exogenous event, whether it’s something from the Trump administration, Italy, the Fed … something that could spook that market.”

How Can Investors Protect Themselves from Any October Volatility?

“For the long-term investor, periods of volatility understandably cause concern,” says Joe Correnti, director, portfolio construction and guidance at TD Ameritrade. “However, our best guidance would be to review your portfolio and consider using these opportunities to make adjustments as necessary.” Having a diversified portfolio, with asset allocations that suit your risk appetite and don’t expose you to too much of any single risk or market, is a popular approach among investors.

If you see the potential for an adverse market condition, you could consider hedging your portfolio, or a portion of it, perhaps by using put options to potentially limit your downside risk. Other, more complex types of hedges (such as futures contracts and volatility products) are available to sophisticated investors. But some investors will decide that the appropriate course of action is to wait out the occasional rough patch. 

“A thoughtfully prepared portfolio is likely ready to withstand any short-term movement in the market,” adds Correnti. That said, it’s important to realize that investing always involves the possibility of losses, even with the most carefully constructed portfolio.

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