October Sell-Off, Anyone? The S&P's 10 Worst Trading Days

For sheer stock-market horror, there’s no month like October.

 (FILES) A file photo dated 19 October, 1987 shows a trader (C) on the New York Stock Exchange shouting orders as stocks were devastated during one of the most frantic days in the exchange's history. The Dow Jones index plummeted 22.68 percent, some 508 points, to close at 1,738.41 points in one record trading session. Ten years later, the Dow Jones revolves around 8,000 points as part of a steady rise that includes gains of some 25 percent in 1997.
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Where were you 25 years ago today? If you were a stock broker, you probably started the day with the usual commute—but ended it somewhere around martini No. 8, trying to drink away the worst day of your life.

Yes, today marks the 25th anniversary of Black Monday—a day when, for no particularly obvious reason, the market decided to shed a quarter of its value. Historically, in fact, October is full of really bad market days—from Black Tuesday, 1929, to the mini-crash of 1989 to several darkish days in 2008. It's not for nothing that investors speak ominously of the "October effect."

Before we spark another panic, let us mention the other side of October's balance sheet. Since 1950, it has actually produced a gain in the S&P averaging 1 percent, according to data provided by market-data maven Doug Short. Only September shows an average decline, of 0.25 percent.

What's more, October accounts for three of the biggest daily gains posted by the modern S&P (launched in 1957)—the top three, in fact. No. 1 is the 11.5-percent gain posted Oct. 13, 2008, and the 10.8-percent gain recorded two weeks later.

[Read: Fearful Investors Still Shouldn't Hide.]

But it's the grim numbers folks seem to remember, maybe because October accounts for five of the S&P's 10 largest daily declines since 1957. Short's data also show that October is the most volatile month by far, averaging an intra-month range of 9.5 percent on the S&P, compared with an average of about 7 percent for all 12 months. October has produced a disproportionate number of market bottoms (which Short defines as the low point of any decline exceeding 20 percent)—five of the 10 since 1950. It produced only one market top, in 2007.

Is the October effect all in our minds? Maybe, although psychology matters to the extent that market expectations are self-fulfilling. There is, of course, no particular reason why October should be riskier than any other month. And there have been Octobers when the market should arguably have gone through the floor, but didn't. Indeed, this month marks another anniversary that illustrates the power of market mind over geopolitical matter.

Fifty years ago Monday, President Kennedy announced to a gobsmacked world that the Soviets had installed nuclear-capable missiles a stone's throw from South Beach, deep in the Cuban jungle. Upping the Soviets' ante, Kennedy imposed a naval blockade on Cuba (politely rebranded a "quarantine") and threatened a "full retaliatory response" should the Soviets launch their weapons at "any nation in the Western hemisphere."

It was not the sort of talk that normally warms the investor's heart. And yet the S&P fell a relatively scant 2.67 percent the day after Kennedy's announcement (made after the close of trading on October 22, a Monday.) In fact, it rallied 3.2 percent on October 24—a day when lots of reasonable people saw a better than even chance that the Western World would be vaporized at any hour. The market appears to have priced in Armageddon, then decided it was oversold.

For The Week The World Stood Still, the S&P was down only 1.8 percent, and for all of October 1962 it was actually up slightly.

Today's market faces lots of headwinds, but thermo-nuclear annihilation isn't one of them. If the S&P has weathered the past few years down less than 10 percent from its all-time peak, we're probably safe this October.

Then again, there are still 12 days to go. Here's a look at just how hysterical things can become when stocks get spooked. Here are the 10 worst trading days in S&P 500 history:

1) Date: Oct. 19, 1987

Decline: 20.5 percent

Conditions: Ronald Reagan's "Morning in America" was in its home stretch and the economy was growing at 4 percent, but federal budget deficits were piling up fast and talk of American decline was in the air. There is no clear reason for the sell-off, which followed a three-day decline of 10 percent. Analysts have blamed everything from program trading run amok to worries about monetary policy. Whatever the cause, within two years the S&P had regained its 1987 peak and resumed the greatest bull market in history.