It is that time of the year again. Every year, people start talking about a possible stock market crash in October, because everyone remembers the historic crashes that took place in October 1987 and October 2008. Could we witness a similar stock market crash in October 2018?
Without a doubt, the market is primed for another crash. Stock valuations have been in crazytown territory for a very long time, and financial chaos has already begun to erupt in emerging markets all over the globe. When the stock market does collapse, it won’t exactly be a surprise. And a lot of people out there are pointing to October for historical reasons. I did not know this, but it turns out that the month with the most market volatility since the Dow was first established has been the month of October…
The difference is quite significant, as judged by a measure of volatility known as the standard deviation: For all Octobers since 1896, when the Dow Jones Industrial Average was created, the standard deviation of the Dow’s daily changes has been 1.44%. That compares to 1.05% for all months other than October.
Like me, you are probably tempted to think that the reason why October’s number is so high is because of what happened in 1987 and 2008.
But even if you pull out those two months, October is still the most volatile…
You might think that this difference is caused by a few outliers, such as the 1987 crash (which, of course, occurred in October) or 2008 (the Dow suffered several thousand-point plunges that month as it reacted to the snowballing financial crisis). But you would be wrong: The standard deviation of daily Dow changes is much higher in October than other months even if we eliminate 1987 and 2008 from the sample.
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