“Darkness falls across the land, the Midnight Hour is close at hand” Rodney Lynn Temperton
Halloween is a ripe time for spooks and superstitions to begin to enter even the most rational of minds and the financial markets are by no means spared its creepy effect as many of its participants fall victim to the Halloween Effect.
The Halloween Effect is the “October” fear that the market is going to experience a major market crash and even the most logical and reasoned of people develop a sense of foreboding during this month.
Is it real or just a horror created by imagination
The October Effect is much more about superstition than hard facts but there is always a little fire to fuel every fear or a little truth in every belief and history has provided a fair amount of evidence to stoke our trepidation.
October was the month when the Panic of 1907 hit Wall Street. This was a short lived, but brutal, banking and financial crisis in the US. Banks faced the onslaught of a 6-week run where depositors rushed to withdraw their money, leading to a major liquidity crisis and triggering a devastating recession which saw the second highest volume of bankruptcies in the US to date.
Black Monday, Tuesday and Thursday all occurred in October 1929 precipitating the catastrophic Great Depression.
And finally, the great crash of Black Monday in October 1987 saw the US Dow Jones drop by 22.6% in a single day allegedly caused by Computer Trading Programs caught up in a self-fulfilling loop of selling in response to the market falling.
Feeling a slight chill of foreboding down the spine yet?
If not, consider this, as we sit here at the beginning of October 2021 the US S&P 500 has been on an unprecedented tear, going up every month between January and August 2021. The slight dip in September has raised concerns amongst some in the financial community that this means the market is still stretched and on the precipice of a major correction!
In reality though, September has had way more historical downturns than October. In fact the catalysts that set off the 1929 crash and the 1907 panic occurred in September or earlier.
The original Black Friday occurred on 24 September 1869 when a sharp drop in gold prices kicked off market panic. The drop was caused by the US FED selling a significant amount of gold unexpectedly and bankrupting speculators who were trying to control the gold market by forcing the gold price upwards.
Black Wednesday on the 16 September 1992, was the day that George Soros infamously broke the bank of England. He bet a huge amount of money against the British Pound in anticipation of it suffering a major devaluation. England had already been buying up large amounts of the Pound to keep its price up. On that fateful day in 1992 as the Bank of England struggled to keep the Pounds value high, desperately buying as much of the currency as they could, Soros in a David versus Goliath type standoff opposed their efforts by selling the pound in eye-watering quantities ultimately beating the Bank of England and destroying the Pounds value.
September 2001 and 2008 saw unprecedented events which caused “stomach- lurching” declines in the US Dow Jones following the horrific World Trade Centre bombing in 2001 and the 2008 Global Financial crisis which saw $1.2 trillion wiped off the US economy in 1 day.
Arguably September is the witching month for the market!
How can you make October more about the treats than the tricks
The fact that October spooks fear in many a seasoned trader can cause the market decline to be a self-fulfilling prophesy as many of them sell out of the market in October to avoid the potential crash.
Declines in 1987, 1990, 2001, and 2012 turned out to be the start off major market rallies.
It’s hard to see from the heights the market has reached this year, how a corrective decline could be followed by a huge rise in the market, but a big decline nonetheless gives investors like you and me the opportunity to get into the market more cheaply than we might have otherwise and position ourselves to profit from just such a recovery.. So be vigilant, get your investing cash ready and invest when the market goes on sale.