October Volatility

Contributors

s history has shown us, the month of October tends to be the most volatile month of the year. Economists, market theorists, and historians alike have studied and attempted to explain the heightened volatility. As is often the case with extreme market ups and downs, there are different angles to evaluate the landscape and determine what is going on. However, coming to an agreed upon consensus tends to be a bit more difficult.

While there may not be one overarching root cause of October’s volatility, here are some factors that may play into the daily gyrations:

• Volume: Mutual funds have a fiscal year end on Halloween, October 31st. As a result, during the final weeks of this period, many funds make end of fiscal year trades to close out their books, thus, significantly increasing the volume of institutional trading. This October fiscal year end allows mutual funds to confirm their taxable events and necessary capital gains distributions to investors which they make by calendar year end.

• History: Historical market crashes (1929 and 1987) occurred in October. However, catalysts for these crashes were an accumulation of factors playing out in weeks and even months prior. Of course, as a result of this history, there is a stigma associated with October that has anecdotally created higher levels of anxiety for most investors and that anxiety can contribute to volatility.

• Politics: Midterm and presidential elections occur in early November, heightening volatility in anticipation of an election year.

• Earnings: Many public companies report third-quarter earnings in October. Additionally, it is at this time that they tend to provide their outlook for the coming year. For that reason, third quarter reporting in October tends to trigger a greater response than statements made in other periods of the year.

• Psychology: An expectation of higher volatility can often lead investors to start selling into any signs of market weakness out of fear that it is October and “here we go again.” This anxiety induced behavior can lead to excessive day and options trading which can then cause a spike in the Cboe Volatility Index, or VIX. In essence, the fear of things going down leads people to sell.

This year, escalating trade tensions, impeachment inquiries and slowing global growth may have spooked investors even more. Of course, we believe it is important to remember that we are not in a recession and our economy is still growing, albeit slowly.

Now, with the assistance of hindsight, it is possible that investors may extrapolate that October’s volatility could be a combination of many factors and there may not be one absolute or fundamental source. We believe that short-term volatility, although painful for some investors during the experience itself, should not cloud individual goals and long-term planning. Unless your specific situation has changed, we believe it is a prudent strategy to take inventory of market and economic conditions while staying the course.