October came early this year.
Stock market meltdowns traditionally have occurred in October -- in 1929, 1987 and 1997. This year, the opening of the horror film Halloween H2O in August seemed to spook investors. The response was a market horror show.
By the week before Labor Day, the stock market went into one of its worst tailspins in history -- and another Black Monday, Aug. 31, when the Dow Jones industrial average fell 512.61 points, was emblazoned in Wall Street history.
Equity analysts have different opinions about the seasonality of markets and the role it has played both in previous cycles and the current one.
Peter Stonberg, head of active equity trading at State Street Management and Research, Boston, believes the market declines in the fall are partly related to falling earnings estimates.
"Usually, when analysts start looking at corporate earnings in the beginning of the year, they're more optimistic. In the fall, analysts start to take a realistic look and often lower their estimates. This causes stock prices to decline," he said.
Mark Stumpp, senior managing director at Prudential Investments, Newark, N.J., agreed: "In the fall, earnings estimates tend to get sliced fairly heavily." He noted earnings revisions have been heavier this year than in previous years.
"My view of looking at the seasonal patterns of the stock market is that it's like looking at Rorschach ink blots -- people can see in them what they want to see," said Sylvester Marquardt, director of equity research for John Hancock Mutual Funds, Boston. "The analysis is not fundamentally based. I don't subscribe to the theory that October is a bad month. If we observed enough Octobers over time, we would see a normal distribution of investment returns," he added.
Timothy Dalton, chairman and CEO of Dalton, Greiner, Hartman, Maher & Co., New York, agrees with Mr. Marquardt. "I'm not a great believer in the October effect," he said. Even in 1987, when October was considered the worst month of the year, the bear market actually started in August, Mr. Dalton said.
Rocky Barber, president of William Blair Mutual Funds, Chicago, said the so-called October effect "is so widely known that it is being talked about a month in advance, on the local news and in Newsweek." Therefore, he said, the "effect" has already been discounted by investors.
"It's an overreaction to something that's not there to begin with," he said. "If people think there's a bogeyman in the closet, we've opened the closet and looked at it." So there's nothing to be afraid of, he believes.
The only seasonal effect that's demonstrable, Mr. Barber said, is tax-loss selling. "It used to take place in December. Then, eight to 10 years ago, it began to creep back to Thanksgiving. Now people say it takes place during the whole fourth quarter," he said. In fact, some stocks now rally in December because investors believe the tax-loss selling is over.
Bruce Jacobs, principal and co-chief investment officer of Jacobs Levy Investment Management, Roseland, N.J., concurs that tax-loss selling is a legitimate problem, which probably will be worse this year. "This year there are many stocks with the potential for tax-loss selling," he said. "Those stocks will be under further downward pressure later this year."
This year's market decline actually began before the Aug. 31 crash, according to Mr. Dalton, who said the United States is now in an official bear market. "Eighty per cent of the stocks on the New York Stock Exchange are down more than 20% from their highs, and 95% of Nasdaq stocks are down more than 20%. That's a bear market."
Added Mr. Marquardt: "In the 20 years that I've been in this industry I have never seen such a confluence of negative events." He ticks them off: "The problems in Asia, Russia, Latin America and the absence of any leadership from the two nuclear superpowers, the United States and Russia."
But he also believes that "a number of these uncertainties could be resolved over the next few months." He also expects the Federal Reserve Board to cut interest rates soon, which would obviously give a boost to the market.
But State Street Research's Mr. Stonberg said, "The Fed needs more reasons to ease. It might not happen for a couple of months, and the market will be lower than it is now." He is also extremely bearish and predicts the Dow could fall to the 6,000 range. "A lot of people won't say it," he said, "but we're in a bear market, and in a traditional bear market stocks are down between 30% and 50%.
Mr. Stumpp remarked: "I don't know what could happen to make people more pessimistic than they are now. "I suppose Ken Starr could start an investigation of Alan Greenspan."
He believes market psychology always plays a big part in the October effect and is doing so now.
"It's been proved as the days get shorter and the weather gets worse (in the fall), stocks tend to go down. Stocks even decline more when it rains in New York," Mr. Stumpp observed.
The market is in a period of extreme volatility, which could last several years, according to Mr. Stumpp. "Volatility goes in long curves, generally about three-year intervals," he said. In the years surrounding 1995, market volatility was low. Mr. Stumpp expects the current volatility to last a few more years. However, he believes it might work out well for investors "who can pick the level they like and get back into the market if they want to."
