The U.S. stock market has been volatile in September. Brace yourself for October. According to Market Watch, September has the reputation of being the worst month for the stock market, but October far and away is the most volatile month of the year —
as you can see from the accompanying chart. So if this October follows the historical averages, the stock market won’t lose as much as it has so far in September but investors will still feel whipped around.
You might think October’s historical volatility can be traced to the U.S. market crashes that occurred in 1929 and 1987, each of which occurred during that month.
But you’d be wrong: October remains at the top of the volatility rankings even if those two years are removed from the sample. Nor is there any trend over time in October’s place in those rankings:
If we divide the period since the Dow Jones Industrial Average DJIA was created in 1896 into two periods, October is the most volatile in both the first and second halves.
Why would October be the most volatile month? I’m not aware of any plausible theory, and that normally would be a reason not to expect the historical pattern to continue. But not in this case.
That’s because an expectation of volatility can itself lead to greater volatility. So the fact that past Octobers have been so volatile is a reason to expect this coming October to also be a particularly choppy month on Wall Street.
If so, our job is not to get spooked by October’s volatility into going to cash. Of course, you may have other reasons why you might want to reduce your equity exposure. But if you were otherwise wanting to be heavily invested in equities, fasten your seat belt and hold on.
