Street Sense: The fundamentals of stock market investing
Why Investors Dread October
Since 1929, most of the big stock market crashes have occurred in October. This year, the risk is fairly low.

If there's one month on the calendar that strikes fear into the hearts of investors, it's October. Though very few of us were around at the time, the crash of October 1929 is a sad chapter in American economic history. The unregulated financial markets of that era left many investors wiped out in a single day.

Today, with all the safeguards in our financial system, only the most foolhardy speculators run the risk of being wiped out. But what the recent dot-com "bubble" taught us is that there are still people who are more than willing to throw good money into bad stocks.

And even those of us who attempt to follow the most prudent investment strategies need to be reminded of the lessons of past Octobers. The October 1929 market crash may be a dim memory, but many of you remember the October panics of the 1970s and the huge crash of October 1987 that cost the Dow Jones Industrial Average a third of its value and drove many investors out of the stock market for years.

ILLUSTRATION: NANCY HARRISON

OCTOBERS CAN BE GOOD OR BAD

Is there something about October that lends itself to crashes? Or is it just coincidence that so many market breakdowns have taken place in the tenth month of the year? The answer is probably somewhere in between.

To understand why Octobers can be scary for investors, it's first necessary to understand that the stock market tends to either rise or be fairly benign during the summer. After Labor Day, people start paying more attention to economic realities. If there's real cause for concern, the stock market will begin to slip in September. Then, like a snowball gathering momentum as it rolls down a hill, the panic hits in October.

But not every October. In many Octobers, the market has advanced. How the stock market acts in October primarily depends on the economic environment that exists at the time.

WHAT ABOUT THIS YEAR?

The odds of an October crash this year appear to be fairly remote. Due to a combination of falling interest rates, the end of recent speculative excesses, and the market-shaking terrorist acts of Sept. 11, the environment for a major market crash just doesn't exist right now.

Although the economy continues to slow and companies are announcing layoffs every day, most of the bad news has already been factored into today's stock prices. Remember, the stock market is a leading indicator and is always looking about 6 to 12 months ahead. Stocks are most vulnerable when everything looks rosy and investors have become complacent. The economy we're now experiencing is relatively weak and fear is rampant, factors that are keeping investor expectations very low. This is hardly the type of environment that produces a crash.

For the balance of the year, investors should expect a sluggish market. Because investors use the last few months of the year to sell their losing stocks for tax losses, the hard-hit technology sector is likely to stay weak as the year winds down. Some of this selling could be offset by bargain hunters anticipating much better business news in 2002.

LOOK AHEAD

If you've been reluctant to enter the stock market because of the October "jinx," begin looking at companies and industries that have the potential to prosper in 2002. What's ahead will determine whether stocks go up or down from here.

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.