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.
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.
2) Date: Oct. 15, 2008
Circumstances: That four of the worst 10 days in S&P history took place within two months of each other says something about the severity of the 2008 meltdown. The spiraling subprime crisis had already consumed Bear Stearns and knocked the S&P 20 percent off its all-time peak when the September 15 collapse of Lehman Brothers broadsided the market. The October 15 decline came after an 11-percent rally earlier in the week and was followed by a 4.2-percent rally the next day. Possibly the only thing on the rise was Dramamine sales.
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3) Date: Dec. 1, 2008
Circumstances: Continued subprime/Lehman/AIG fallout. Just to put a fine point on matters, the National Bureau of Economic Research officially declared 2007 a year of recession.
4) Date: Sept. 29, 2008
Circumstances: Markets were still on the ropes from the Lehman failure when the U.S. House of Representatives pole-axed it by rejecting the Bush administration's proposed $700 billion bailout of the financial industry. Three days later Congress changed its mind, and lo, TARP was born. But the financial crisis was just beginning, as was the market's historic slide.
5) Date: Oct. 26, 1987
Circumstances: Everyone remembers Black Monday, but who remembers Brownish-Grey Monday a week later? OK, we just made up that name, but the market's October 26 decline, at the time, was the S&P's second-biggest ever. The spark: renewed panic in overseas markets that eclipsed a rally following the October 19 crash.
6) Date: Oct. 9, 2008
Circumstances: Ok, this is just a bad, bad year.
7) Date: Oct. 27, 1997
Circumstances: What became known as the Asian Contagion started on July 2, 1997, when Thailand devalued its currency, sparking devaluations and defaults throughout Asia. Regional stock markets collapsed too, and eventually the panic reached U.S. shores. The plunge triggered the first use of the New York Stock Exchange's trade-halting "circuit breakers"for the first time, and the S&P recovered most of its losses the next day, rising 5.1 percent.
8) Date: Aug. 31, 1998
Circumstances: While Americans were enjoying the dot-com boom and fixating on Bill, Monica, and the meaning of "is," the world around them was falling apart, partly as a result of the Asian crisis. On August 17, Russia devalued its currency, defaulted on domestic debt, and suspended payments to foreign creditors. That sent waves of panic through European and Latin American markets. It also rocked a little-known hedge fund called Long-Term Capital Management. The market bounced back 5 percent a week later, after the Federal Reserve vowed to cut rates if necessary to limit the damage..
9) Date: Jan. 8, 1988
Circumstances: Still spooked by the previous October's mayhem, the market was perhaps overly vulnerable to bad news. It came in the form of White House documents, reported by the Washington Post, showing that the federal budget deficit might widen significantly in the coming year. Others feared the impact of regulations, to be announced after trading, developed in the response to the October 19 crash. Even nominally good news hurt: The Labor Department's report that unemployment had dropped to its lowest level in nine years prompted fears of an interest-rate increase.
10) Date: Nov. 20, 2008
Circumstances: Yet another spasm of fear amid the post-Lehman fallout, led by financial stocks. At 752, the S&P was down 52 percent from its October 2007 peak. But this was just a rest stop on the way to 677, the bottom reached on March 9, 2009.