There is an ancient Chinese curse – “may you live in interesting times.” The saying has a sort of wry truth to it. After all, quiet and persistent growth isn’t very exciting, while lurches and crashes in the market are very interesting, indeed. With that in mind, as we approach the month of October, we should keep in mind that it is the most interesting time of all.
October has traditionally been a time for market disasters. On October 29, 1929 – known as Black Tuesday – the market fell 90% in the event that would trigger the Great Depression. On October 19, 1987 – known as Black Monday – the stock market fell by 22% in one day. The financial crisis of 2008 brought a stock market plunge that began on September 29 of that year and continued through the first week of October.
But three events in a century – as exciting as they may be – do not make for a trend. So how can we measure the level of volatility in the stock market? One method is the VIX Index. A beneficial outgrowth of the most commonly-used method for options valuation, the VIX uses the implied volatility in 30-day S&P 500 options to determine the relative level of volatility expected in the market over the next month – a sort of “crowdsourced” volatility level. Because volatility can so often be scary (see above), the VIX Index is sometimes colloquially referred to as the “fear index.”
If we take the monthly averages for the VIX index from 1990 to the present, we get the following chart:
Clearly something is going on in October. But what? There are many theories.
On theory suggests that after a summer of vacations, many stock market analysts and traders return after Labor Day and begin to make major trades. This causes an uptick in volatility that spikes a month later, in October. Another theory suggests that the volatility is influenced by the US Government, whose fiscal year begins on October 1. Perhaps it is aligned with changes in the Chairman of the Federal Reserve, whose term ends every four years in January, and whose replacement is often named in October. A final theory suggests that it is simply a reflection of companies reporting their 3rd quarter returns (giving an idea of the summer season).
It’s difficult to be entirely certain what causes the rise in volatility in October. However, it seems likely that – as usual – the market will be in for a bumpy ride. Not all is lost, however. Though October brings volatility with it, it does not always bring market crashes. Since the financial crisis, in fact, the 4th quarter of the year has been associated with the largest stock market gains. So don’t necessarily rush to sell off your portfolio. But maybe don’t check it every day this month – it’ll be better for your nerves.
