October Stock Market Volatility – The Myth

The Psychological effect behind the Stock Markets’ Most Volatile Month.

Generally, the volatility in October has been well-above average, and this does have a psychological effect on investors’ minds. The biggest market crashes – Black Monday/Tuesday and other turmoil had occurred in October making it the “Jinx Month”.

The sharp and sudden drop that occurred last week shows that October is living up to its reputation of being the Stock Market Most Volatile Month. It could be investors being superstitious, but so far, there are not known drivers only some theories which include:

• The return from summer vacations
• The federal government’s fiscal year which begins on the first of October
• The third-quarter corporate earnings.

On average, more daily moves above 1% are recorded in October. The S&P500 recorded three more than 1% daily moves already which kind of justified the belief.

World Equity Indices (% Change) – Month-to-date

Source: Bloomberg Terminal

Besides the myth, rising yields are set to be the challenge for this quarter and appear to be the primary driver behind the recent surge in volatility. The prospect of more instability is high and quite alarming given that the US stock markets are already inflated. The actions by the Fed have also put the stock markets in a dangerous bubble.

Are the markets prone to more volatility? Alternatively, does the recent fluctuations signal a bear market? The recent weeks of volatility are evidence that trading equity will likely remain choppy in the short-term. At this stage, it is difficult to recognise whether the bull market has reached the top and investors need to get out before the bear market or whether investors should stay away from the “buy the dip” strategy in the emerging and Asian equity markets.

All in all, short-term investors might find it hard to catch the rhythm of the stock markets, but if investors were to maintain a long-term view, it might be worth listening to Warren Buffet advice:

“Buy, Hold and Don’t watch too closely when the market sells off.”