October can be scary for stocks but there is no reason to panic
NEW YORK » Investors know October is the stock market's scariest month. But this October finds them even jumpier than usual. The magnitude of the year's calamities -- the tsunami, the Pakistan earthquake and Hurricane Katrina -- has prompted some to prepare for disasters of almost every stripe.
"How might another influenza pandemic affect the market?" Banc of America strategist Thomas McManus wrote to clients this past week.
The declines in the first half of the month haven't made anyone calmer. The Dow Jones industrial average has fallen 281.36 points, or 2.66 percent so far. Percentage declines in the Nasdaq composite and the Standard & Poor's 500 are even steeper: The Nasdaq has lost 4.03 percent and the S&P, 3.44 percent.
Now that we're midway through the month, it's worth looking back at what past Octobers have brought and looking ahead to assess investors' biggest fears for the immediate future.
If investors think October has the potential for absolute misery, it's because most of the market's darkest days came in October: the crash of 1929, the Black Monday crash of 1987 and 1989's Friday the 13th mini-crash.
According to "The Stock Trader's Almanac," Oct. 11 has historically been the worst trading day of the year.
But is October really that bad? The truth is that October might be best compared to a usually charming friend who gets drunk and mean only on the extra day of a leap year.
During the last 33 years, the major indexes have gained points in October more often than they've lost. Even on Oct. 11, there's still a 23.8 percent chance the market will rise, according to the Trader's Almanac. That doesn't sound half bad if you're, say, a Cleveland Indians fan.
This year, Oct. 11 was a ho-hum day, ending mixed, with the Dow up slightly, but the Nasdaq and S&P 500 down slightly.
October tends to be the month the market hits bottom and moves higher, according to Jeffrey Kleintop, chief investment strategist for PNC Advisors. Some call October "the bear killer," since October has turned the tide in nine of 18 bear markets following World War II.
"In both 2002 and 2004, October saw a weaker stock market and declines in the index for the year, but then led into a strong rally," he said.