The Lato Letter: Volume 3, Issue 10.

The Lato Letter: Volume 3, Issue 10.

Last week, I was asked by a couple of clients if I was concerned about the fact that October was coming because October is ALWAYS such a horrible month for the equities market. There is no doubt that there have been a few very notable Octobers that have been absolutely horrible months for equities.

Now approaching 100 years ago, the Great Depression was sparked by the market collapse of October 1929 and I can certainly remember the fear that my clients and I had on October 19, 1987 when the S&P 500 Index fell over 20% in a single day. More recently, the 2008 financial crisis encompassed an October decline of 16.8%. You would think that these three Octobers alone would be enough to make October the worst month for equity markets but that is not the case.

The chart below, courtesy of Yardeni Research, shows the average monthly return for the S&P 500 Index since 1928.

v3_i10_chart

* Data are through May 2014.

Source: Standard & Poor’s Corporation and Haver Analytics.

The average annual return for the S&P 500 Index for October, since 1928, is actually positive 0.4%. Even more impressivet, the five Octobers since the financial crisis have had returns of -1.9%, 3.6%, 10.8%, -2.0% and 4.5% for an average return of 3.0%. The chart also shows that the worst month of all is actually September; which we are now half-way through.

I believe that the fact that many investors fear October goes back to how our brains are wired when it comes to remembering positive or negative impacts. Behavioral psychologists have shown that negative impacts stay with us and have much more profound effects than positive impacts. Similarly, the significantly negative Octobers have stayed with investors far longer and far more profoundly than the average Octobers have.

In the same vein, a major factor in why Padlock remains constructive on the equity markets after five years of good returns, is that the tumultuous events of 2008 and 2009 have stayed with investors longer and more profoundly causing equities to continue to have far better risk reward parameters than fixed income securities. With the eventual easing of those memories and a minor change in the flow of funds from bonds to stocks, equity prices should continue to do well.

Fear not October and be ready for the strongest seasonal period historically which is November to April.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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