Are We Heading For An Old Fashioned October Crash?
While September is historically the worst month of the year for the stock market, October is the month that sends shivers down investors’ spines. And it’s not hard to understand why.
After all, the worst market crashes in history have occurred in October.
In late October 1929, the market dropped 23% across two days now forever known as “Black Monday” and “Black Tuesday”. And over the next two-plus years, investors watched in horror as the Dow Jones Industrials lost a whopping 89% of its value.
Of course, the crash of 1929 ushered in the Great Depression, the longest and most widespread economic crisis of the 20th century.
Then 58 years later, on October 19, 1987, the US stock market experienced its second “Black Monday”. The Dow plunged by a mind-boggling 508 points and registered its worst one-day percentage loss, falling 22.6%.
Probably the most amazing part of the 1987 crash story is that the market recovered almost immediately and posted a gain for the year.
When investors think of October market crashes, these two are usually the ones that come to mind. They’re the worst of the bunch and the most well-known. But the market endured other painful crashes in October 1907, 1989, 1997, 2002, and most recently in 2007.
No question about it, October has historically been the worst month of the year for devastating market crashes.
Now, just because the market has crashed a lot in past Octobers doesn’t mean it will crash in October 2013. However, there are some things happening right now that are cause for concern.
First off, the market is in year five of a tremendous bull run off the 2008 financial crisis lows. Since March 2009, the Dow has gained 132% and now sits around 15,000. What’s more, all of the major market indices have set several all-time record highs this year.
While the market has been remarkably resilient over the past five years, you have to wonder if we’re not due for a nasty correction.
Another worry is the ongoing dysfunction in Washington.
Democrats and Republicans have been at each others’ throats for over a decade and have shown little ability to compromise on important issues. The most recent impasse is over the federal budget (and Obamacare) which has now led to a partial shutdown of the US government.
And that’s not all.
Another nasty fight over the debt ceiling appears to be on tap this month. Treasury Secretary Jack Lew has warned Congress that the deadline for raising the debt ceiling is October 17th.
In other words, if Congress fails to raise the debt limit by the 17th, the federal government could begin defaulting on its loans.
You may recall the last fight over the debt ceiling was a nasty, embarrassing affair that led to a 15% drop in the Dow. And the US government lost its AAA credit rating for the first time ever.
Last but not least, third quarter earnings season kicks off this month.
For most of the year, analysts have been anticipating a strong pick up in earnings over the second half of 2013. However, those same analysts have been revising their estimates lower over the past few months. And now, there’s concern we could see downward revisions to fourth quarter guidance when companies report.
If the analysts are correct, a disappointing earnings season could be too much for the market to bear.
There’s no question these three issues bode ill for a stock market that is trading just off its all time highs. However, the market has faced a number of potentially catastrophic events over the past few years and continued to move higher through them all.
Hopefully, this time will be no different.
With that said, you may want to take some profits off the table to protect yourself from the worst-case possible scenario. The best place to start would be with your highest risk investments. These are the most likely to post the biggest losses in any market correction or crash.
Profitably Yours,
Robert Morris
Category: Stocks
