Ever since the stock market crash of 1929, the month of October has loomed menacingly in the minds of equity investors.
Statistically, September has been the worst month for stock markets, even though many days in October have produced some of the largest one day drops. Who can forget Black Monday in 1987 or, in more recent memory, the October that just passed.
Over the past 30 years, one third of the Top 40 one-day plunges on the Toronto Stock Exchange 300 Index have occurred in October.
Across the border, American investors have been somewhat less prone to this effect, where approximately one quarter of the Top 40 one-portfolio, day plunges on the Dow Jones Industrial Average have occurred in October.
What are some of the possible explanations to this strange phenomenon that spooks us every October?
Are investors coming back from their holidays and frightened by how poorly their portfolios have performed that year to date?
Maybe they have knee-jerk reactions and make major changes to their portfolios. I strongly believe that third-quarter corporate earnings warnings are a primary factor.
Corporations which have been having problems or facing some write-downs will typically apply these to their third-quarter results so that the fourth quarter will look much stronger.
Coincidently, most firms have their annual meetings following the release of their fourth quarter, so that directors can justify being re-elected again. Imagine if directors had to be voted on based on third-quarter results!
With the market being extremely finicky these days, even a miss in earnings by one cent has been causing certain stocks to crater.
When one company wanes, it seems as though every other company in the sector goes down as well. To further complicate matters, many analysts who had painted rosy earnings estimates for the year, have to make downward revisions as we approach the final quarter, knowing very well that corporations have very little time left to stage a recovery.
One final explanation to consider, is that, for many U.S. mutual funds that engage in tax-loss selling, October is the year end.
With more and more Americans investing in mutual funds, the selling that these funds do to crystallize losses during October (so as to reduce the gains that they would have to distribute to unit holders) has become a major factor.
So, how can an investor protect themselves during the crazy month of October? As any prudent investor would do at any time, you should invest across asset classes, geographically and by investment ideas such as technological or demographic influences.
By doing so, several economic, sector-specific and company-specific events, whether positive or negative, are covered.
It’s not about being right or wrong — every economic sector or asset class is in favour at some time, and out of favour at other times.
Having a mix of different securities and investment focuses, will certainly go a long way in reducing the volatility in any portfolio.
(Anthony Tobias is branch manager with Great Western Financial Corporation. His views do not necessarily reflect those of Great Western Financial Corporation.)
