The October Surprise? By Lewis J. Walker, CFP(R)

What was this year’s October surprise, the oft-touted idea that stocks tend to decline in October? The surprise was “no surprise.” Despite October’s reputation as a scary month for stock investors, most statistics do not support the so-called October effect.

Much investor behavior and/or anxiety is rooted in remembrances of times past. The Crash of 1987 occurred on October 19, taking the Dow Jones Industrial Average down -22.6%. October 1929 is part of market lore, and Black Monday, Tuesday, and Thursday of that grim month still lurk in ghost like fears of Black Swans.

In finance, a “black swan event” is a hard-to-predict and rare happening outside of the realm of normal expectations or “standard deviation” calculations. The bankruptcy of Lehman Brothers on September 15, 2008, and the subsequent “breaking of the buck” by Reserve Primary Fund on the following day, rattled markets far beyond the normal “bell curve of probabilities.” The Reserve Fund was a ginormous money market fund that quoted shares at a constant price of $1, as did other such funds. Investors were exposed to losses as the fund had to write down $785 million in debt issued by Lehman Brothers. Share prices fell to 97 cents as redemptions were suspended to forestall a “run on the bank.” The rest is history. The Federal Reserve Bank (“Fed”) stepped in to prop up financial markets and here we are in 2015 still debating Fed policy and interest rates still well below historical norms.

September also gets a bad rap as a poor month to invest and we did see an inverted V-shaped pattern in U.S. stock indexes after the August slump. However, if you had owned or bought at the opening the SPDR Dow Jones Industrial Average ETF Trust (DIA) on September 1, 2015, by the close of trading on October 30, 2015, you would have seen a gain of 9.34%. Much of that gain came in October as major indexes, Dow and S&P 500, rose by more than 8%.

The surprise was to the upside! Regulators compel advisers to note that past performance cannot be projected into the future, however, that goes for negative expectations as well as positive numbers. No matter how we think about the future, the presence of pink flamingos and elegant white swans will always suggest that a black swan may be lurking nearby to upset assumptions for some period of time.

Global stocks also bounced back after a summer swoon as major central banks—Europe, Japan, China—hinted at continued stimulus to further growth and battle deflationary forces. While the U.S. Federal Reserve Bank left the door open for a possible interest rate hike in December, investors began to see that possibility as potential good news, that the Fed believes that our recovery is strong enough to sustain a nudge back toward “normalcy” in interest rates.

Even with a small hike in the Fed funds rate, we may see interest rates far below normal for an extended period. Remember, in late 1979, near the end of the inflationary decade of the 1970s, the Fed funds rate hit 20% in an effort to break the back of inflation. That same rate now is 0-25 basis points (zero to one-quarter of 1%), so even a jump to 25 to 50 basis points is relatively meaningless in the big picture scheme of things. Core U.S. inflation for the trailing 12 months ending September 2015 was running at 1.9%, not 13% as it was in late 1979 at its “stagflationary peak.” On October 31 a 30-year fixed rate mortgage was quoted at 3.82%, a screaming bargain for anyone old enough to remember the Jimmy Carter years!

A 10/30/15 report from Allianz Global Investors noted that despite a 3rd quarter drop in GDP, “the U.S. growth trend is healthy.” Despite transitory factors such as companies unloading inventories, consumer spending was robust. Sales of durable goods and vehicles were strong, indicating confidence. Investment in commercial and residential real estate are solid.

What it all tells us is that attempts at market timing based on psychological bromides rarely have the expected results. Stocks are valued as a liquid growth alternative and a source of dividends. That markets are volatile and surprise, positive and negatives, a given, must be factored into your long term wealth accumulation or cash flow needs on a risk adjusted basis. Those retired or soon-to-be retired should have adequate reserves in safe and low volatility assets.

But as this is written on Halloween eve, at least we can cheer October, 2015, as a treat and not a trick. More sugar, anyone?

Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com