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October Surprise

by M. Burke Koonce, III

October. The name of the month conjures particularly vivid imagery. Autumn leaves whispering in the trees and crunching underfoot. Clear, cool nights with spectacular sunsets. Playoff baseball. And of course, fears not just of goblins but of financial market mischief.

More than any other month, investors associate October with spectacular market sell-offs, as evidenced in the wave of concerned emails and phone calls financial advisors begin receiving shortly after Labor Day. Of course, this is not without reason. Some of the biggest drawdowns in history have occurred beneath the Hunter’s Moon. In 2008, the market fell 17 percent. In 1987, it swooned 22 percent. The market declined 20 percent in 1929. But as my colleague Dan Tolomay pointed out last month, October is actually not a particularly scary month in terms of historical returns. Going back to 1928, October has delivered positive returns more often than not. While October does have a higher-than-average standard deviation, it is not the highest (August!). In terms of range of returns, October doesn’t even crack the top half. Finally, of all the “black swan” market returns that have occurred since 1928, October brings just slightly more than random chance would predict.

Now, markets are made up of human beings, and human beings experience fear, so the market isn’t always going to be a fun place. But last month was a perfect example of why trying to time the market is more difficult than bobbing for apples, and perhaps an even less profitable exercise. Markets soared in October. The S&P 500 was up almost 7 percent. The Dow Jones climbed almost 6 percent, and the NASDAQ rose slightly more than 7 percent. Those numbers are closer to historical annual average returns than monthly returns. If you had gotten spooked out of the market last month, you would have missed the best monthly return since last November, when the world was reacting to news of COVID-19 vaccines and the beginning of the end of the pandemic.

This is not to say there aren’t real problems with the U.S. and global economies. Inflation is beginning to look persistently high, fed by labor shortages and supply chain problems. The delta variant of COVID-19 continues to circulate, and wealth inequities are fostering growing social unrest around the world. But fear is the fuel that drives markets higher, not lower. After all, if there were no fear in the marketplace, there would be nowhere to go but down.

Over time, liquid markets are brutally efficient, and fear gets priced in quickly; the result is that market returns tend to run away from consensus not towards consensus—after all, that’s what makes returns possible. As Dan said last month, ‘rather than panic or prepare for an autumn decline, enjoy the beautiful weather.” I would only offer that while the weather outside won’t always be beautiful, and returns will rarely be as pleasing as they were last month, the key is to not get distracted by your emotions or short-term thinking and let the magic of compounding continue to work in your favor. No witch’s spell is more powerful than that.