Investors’ fears of a possible stock market crash in October have no statistical support: the risk of a sharp decline in the US stock market this month is no higher than during other periods of the year. This is stated in a MarketWatch column.
Performance after October lows
The article’s author, Mark Hulbert, notes that market participants’ belief in October’s particular danger may artificially depress prices during the month. According to his data, in 93% of years since the S&P 500 index was created in 1957, its value at the end of the year was higher than its October low.
The average gain of the S&P 500 from its October low to the end of the year was 7.4%. This is nearly twice the average increase over comparable periods associated with the other 11 months of the year.
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Hulbert also cites data on the recommendations of several dozen stock market timers specializing in the Nasdaq. Since 2000, their average recommended allocation to stocks in October was 13.6%, compared with 26.1% in other months of the year.
Academics’ assessments
A study led by Harvard University professor of economics and finance Xavier Gabaix indicates that the probability of a one-day decline in October comparable to the Dow Jones index’s 22.6% drop in 1987 is 0.06%. The model estimates the probability of a decline on the scale of the 1929 crash, when the Dow Jones fell by 12.8%, at 0.30%.
According to Gabaix, these very low probabilities apply to any month, and the two worst crashes in stock market history, which occurred in October, are most likely a coincidence. A separate study by Robin Greenwood, Andrei Shleifer, and Yang You assessed the probability of a 40% market decline over two years. The latest State Street Markets forecast, produced after consultations with Greenwood, showed no significant deviation of this risk from its historical average level.
