5 Signs the Stock Market Will Crash in October
By Lou Carlozo
Who needs scary vampires and Frankenstein monsters to spook even seasoned traders when October could bring a month of tricks and no treats? To be sure, a 2015 stock market crash is highly unlikely. But there's always the chance it can be ghoulish for some sectors or off-guard traders.
'October Surprise' In 1972, Secretary of State Henry Kissinger pointed to Vietnam and declared, "Peace is at hand" in what has become known as the October Surprise, a news event deliberately created to have a deciding impact on a presidential election. But when money is on the line, October has often meant blood in the trading pit. Consider these wretched events.
- In 1869, October saw jittery markets a week after the first infamous Black Friday, which occurred on Sept. 24 after the gold market collapsed. Harper's Weekly ran an editorial cartoon immortalizing the event on Oct. 16, 1869.
- With the October Panic of 1907, multiple bank runs and heavy panic selling threatened to engulf Wall Street. In an age before the Federal Reserve, it took a consortium led by tycoon J.P. Morgan to save the market from certain collapse.
- Wall Street suffered the worst crash in U.S. market history in October 1929, an event so gruesome that starting on Oct. 24, it spawned its own Black Thursday, Black Friday, Black Monday and Black Tuesday. Banks began to fail. Big shots rolling in dough one day were beggars standing in bread lines the next. The Dow lost 89 percent of its pre-crash high in the years that followed the Great Depression.
1. China Breaks, Wall Street Quakes
There's no Great Wall of Wall Street that can keep China's economic woes from impacting U.S. markets. The China stock market crash happened less than two months ago, leading to a tumble that's since been dubbed "the Flash Crash of 2015." For brief a period, the Vanguard Consumer Staples fund (VDC) was down 32 percent. That was all many market watchers needed to make them wary of "the China Syndrome."
"It happened so fast and was so powerful that no one could've predicted it even a week earlier," said Jay Sukits, a clinical assistant professor of business administration finance at the University of Pittsburgh's Katz Graduate School of Business. "But the worst thing you can do is panic: to sell right at the bottom of the market."
2. Technology Goes Haywire
The Flash Crash in August also demonstrated that Wall Street can suffer from technology woes. Published reports described how, amidst the commotion, traders were frozen out as they attempted to execute the simplest of moves. The impact was horrific. In six minutes, the Dow suffered its biggest drop in history. Millions of investors were locked out as markets opened and stocks tumbled. Popular trading platforms run by TD Ameritrade, Scottrade and others ran slow or not at all as panic ensued.
The computer crash scenario isn't nearly as far-fetched as you might think. In July, the New York Stock Exchange computers went down for four hours. Traders began to go green -- not with money or envy but with nausea. The disruption rattled investors already on edge with the Greek debt crisis and an overnight market rout in China. For this to happen in October, you would have to witness a big-time tech foul-up combined with unwelcome news from China, Greece, the European Union or Russia.
3. Interest Rates Rise
The possibility of interest rate hikes continues to make investors nervous. Most everyone who owns even a single share of stock has watched the Federal Reserve meetings as though they were lost episodes of "Breaking Bad." Not that the Fed broke bad when it held the line on rates at its September meeting, but a future rate hike is now all but certain. Federal Reserve Chairwoman Janet Yellen indicated Sept. 24 that the Fed still intends to raise its benchmark rate this year.
Does that late month assertion set the stage for October panic? "I would encourage investors to act as if the Fed has already begun to raise rates," said Robert R. Johnson, president and CEO of The American College for Financial Services in Bryn Mawr, Pennsylvania, and co-author of the book "Invest With the Fed."
4. Recession Redux
The Great Recession has been over for six years but it's possible that investors could see a brief rerun in the next few months if foreign turmoil kicks up. "Things are slowing down everywhere and the U.S. won't be unscathed," said David Twibell, president of the Custom Portfolio Group. "In fact, there's a decent chance the U.S. economy will tip into recession sometime in the next few quarters.
"If so, the U.S. stock market is going to go much lower than most analysts expect. So buckle up, look for buying opportunities later this year but don't jump the gun," he said. "Now more than ever, patience is a virtue."
Twibell isn't the only one who sees uncertainty in the economy. "There are a number of indicators that point to a potential fall in stock prices as early as October," said Derek Peterson, president and CEO of Terra Tech and a former vice president with Morgan Stanley (MS).
He pointed out that while the U.S. unemployment rate has fallen to 5.1 percent in August, about 10 percent of workers, or 6.5 million people, are underemployed. Moreover, wages have been flat and 22 million households, or nearly 20 percent, are on food stamps.
5. October Is Historically Horrible
While the stock market crash of 1929 is etched in most everyone's memory, investment experts have more detailed knowledge of disastrous sessions where stock prices fell faster than dead autumn leaves.
"October tends to stick out in people's memories because of the memorable crashes that have occurred," says Scott Laue, a senior adviser with Savant Capital Management in Rockford, Illinois.
He recalled "Black Monday" on Oct. 19, 1987, when the Dow Jones Industrial Average (^DJI) sank by 508 points, a drop of more than 21 percent. He also cited these events: "The markets bottomed out in 1990; in 1997 the 'Asian Contagion' dropped the Standard & Poor's 500 index (^GSPC) by 11 percent in 4 days; in 2002, there was a technology bubble bottom; and in 2008, after Lehman Brothers filed for bankruptcy, the S&P dropped by 26 percent during October." Yikes. Why not sell everything now and move to a hut in Maui? As Laue put it, "The month of October has had some challenging periods. But we always need to remember that 'past performance is not indicative of future results.' "
This story, 5 Signs the Stock Market Will Crash in October, originally appeared on GOBankingRates.com.