Octobers Past Haunt Wall Street Today Knock On Wood, Investors Seem To Be Ignoring Past Dow Collapses

October is the month for Halloween, but that’s not what scares the financial markets.

It’s the fact that the stock market tends to plummet this month if share prices have risen too high, or the economy seems to be slowing down, or America’s trade deficit is big and getting bigger. Like 1929. Or 1987. Or 1989. Or … oh no.

If you read that paragraph and your heart took the kind of leap that a number of brokers’ did on Black Friday 66 Octobers ago - welcome to the club. A number of market watchers have trouble relaxing in October as well.

The phenomenon is a haunting reality on Wall Street, even if it’s not terribly easy to prove, statistically, that it’s significant - or in fact exists at all.

And despite all the angst, it’s looking so far like the purported effect may be taking a breather this year. The Dow closed Friday at 4,793.78, a new record.

Nevertheless, some well-known market predictors claim to have detected startling similarities between Octobers 1995 and 1929.

“Apocalypse Soon,” trumpeted a recent headline in Barron’s magazine, a Bible among the moneyed set. The article, a commentary by market analyst Joseph Granville, predicted that the end is near - for the bull market. “My arguments are based on historical, psychological and technical parallels between 1929 and 1995,” Granville wrote.

Other analysts say similar commentaries seem to crop up every year about this time. Indeed, while some may dispute the historic and technical parallels that Granville alludes to - even though he attests “the signs are unmistakable” - making the comparison at all belies the fact that the crash of ‘29 remains a defining moment for the country’s financial community.

“October spooks people because of the psychology of 1929,” said Stan Weinstein, editor of The Professional Tape Reader, a market newsletter, in Hollywood. “But it’s not the only bad October we’ve had.”

On that point, there’s little dispute. In fact, 1929 isn’t actually the worst October we’ve ever had. The 1987 Black Monday plunge of 22 percent was more severe, by virtually any measure, than the 1929 Black Friday crash, in terms of individual events.

Of course, in 1987 the market recovered and the Dow Jones industrial average actually scored a small gain for the year.

The 1929 debacle, in contrast, heralded the arrival of the Great Depression.

The fact that people speak of an October effect at all is testament to the powerful role that lore and legends can play on Wall Street.

Investment houses may tout their leading analysts, or boast of computer-based technical reports. But the rise and fall of the stock market is also regularly ascribed to everything from who wins the Super Bowl (an original National Football League team means an up year) to changing tastes in women’s hemlines (when hemlines fall, the market follows.)

“The cynical answer is, Wall Street is run by anything that predicts changeful activity,” said Steve Eber, head of Eber Capital Management in Coral Gables. And sometimes the predictions, if they’re taken to heart by enough people, come true. “Everybody gets on the edge of their seats and it becomes self-fulfilling.”

Eber said he’s a firm believer in the “buy and hold” investment school, so he doesn’t attempt to time his investments to short-lived market phenomena. However, he said there may be some logic behind the perception that the market drops in October.

“Many mutual funds end their fiscal years on Sept. 30,” he said. “So it’s possible that in October they sell those holdings they no longer want to keep.” In addition, some investors may begin making their year-end portfolio adjustments in October, the first month of the fourth quarter.

Don Wolanchuk, editor of The Wolanchuk Report, an investment newsletter that focuses on market timing advice, said there is indeed an October effect. The effect this year, he said, is to put a lull on a market that should resume its climb come November or so. The strongest October effect occurs every fourth year, he said. Last year, for instance, the market dropped sharply in October.

“The October effect is always real,” Wolanchuk said. But as someone who believes the market is poised for more gains, he adds: “It’s always the best time to buy stocks, until the next October.”