Is October a bad month?

Continued bull and bear fight in the Indian stock market is shaking the confidence of investors. Though, while writing this column, the Sensex surged over 1300 points (Tuesday, October 4, 2022), the overall market sentiment in the last few weeks has changed from bullish to bearish.

From the stock market perspective, the presence of any bearish sentiment in the month of October is scary for the investors.

   

The month of October has scripted historical market crashes which are still remembered for the financial losses it brought to the investors.

Before deliberating upon the investors’ October dilemma, a moneycontrol report is worth quoting. It states that Sensex and Nifty are down over 6 percent each from Dussehra last year to date. This is the first time since 2011 that both equity indices have posted such losses. In the same period, foreign investors sold around $27.78 billion in local equities, while domestic institutional investors bought shares worth Rs 3.17 trillion.

Despite being a fearful month in the context of investment matters, just a year back, the stock market peaked in October 2021 when the Nifty was trading just above 18,500 at that time. The investors had started to forecast that the Nifty would cross the 20,000 mark. But that didn’t happen and the market slipped into a bear market.

Notably, the Sensex registered a life-time high at 62,245.43 on October 19, 2021. Today, the Sensex has come down to 58000 mark and Nifty back to 17000 level. Every other day, the market crashes leave the investors poorer by lakhs of crores of rupees. This is where the investors have been left wondering where to invest in the market and during the course look for alternative investment opportunities outside the stock market.

At the start of 2022, the markets were still in a bullish phase. The US market was on a roll and the Indian market was slowly getting close to its all-time high. But then everything changed. There are certain factors which forced the retail investors to move out of the market and look for alternative avenues. For instance, inflation mercilessly hurts household budgets.

People began cutting back on consumption. The uncontrolled rising prices of essential as well as non-essential commodities forced the households to cut back their spending. In order to shore up their household finances, the domestic retail investors began pulling their money out. At the same time, the investors didn’t see any quick profit making opportunity in the market and took (and continue to take) exit routes from the market.

Rising interest rates too shook the confidence of investors. The Reserve Bank of India (RBI) is continuously hiking the key policy repo rate. Even, it hiked cash reserve ratio (CRR) when the central bank for the first time in a post-pandemic situation raised the repo rate.

In its latest monetary policy review, the apex bank once again raised the key policy rate by 50 basis points. The repo rate now stands at 5.90%. The rising interest rates have ended the era of easy money and the focus of the RBI is now entirely to bring the inflation to acceptable levels.

It’s a general rule, when interest rates go higher, investors take an exit route from the stock market and move into fixed income assets. At the moment, the rising rates have only widened the exit route for the investors out of the share market and the trend will accelerate with every spell of rate hike.

One of the notable features of the bearish market is the exit of foreign institutional investors (FIIs) from the Indian stock market. The exit of FIIs at regular intervals has prevented the market from scaling new heights and has grossly disturbed the confidence of domestic investors.

Here it’s worth mentioning that millions of new domestic investors flocked the market during the pandemic years and have been picked by market watchers as instrumental to save the market from a total collapse.

One more thing that has been driving negativity in the Indian stock market is that the US is deemed to have been in recession. There is a saying when America sneezes, the world catches a cold. This has given a feeling to the investors that global recession is a step away. With this fear, the market has automatically been witnessing a bear at play.

Today, all the narratives about the market are negative and fear has dominated the investors. The story of stocks going up too much too soon is history. The downward slide of the markets is catching up as a trend when the psychologically promoted “October effect” has already marked its time on the scene.

As already stated in the beginning, the month of October is considered as a ‘fearful’ month in the context of stock markets and world over the investors exercise extreme caution in investment matters. During this month, which they call ‘ghost month’, they don’t get ‘lured’ to the boom in stock markets and remain extraordinarily defensive, particularly when it comes to trading shares and securities.

In other words, the month of October has become folklore among those who follow the market closely, with a history of crashes known as the “October effect”. It often strikes fear among the breed of investors that a downturn is on the horizon when autumn weather begins to roll in. The behaviour of markets in this ‘October effect’ is that stocks tend to decline during the month of October. However, Investopedia explains that the ‘October effect’ is considered mainly to be a psychological expectation rather than an actual phenomenon. Most statistics go against the theory. Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month.

The stock market crash of 1929 that led to the Great Depression occurred in October and is known as a classic example of ‘October effect’. Plunge of 22.6% suffered by the Dow Jones industrial average in 1987 too happened on 19th October and is referred to as “Black Monday.” The 2008 financial crisis also went down in October, when the Dow plunged 2,675 points after investors fearing a financial collapse went on a panic-driven stock-selling spree that resulted in* five of the 10 biggest daily point drops in the iconic Dow’s 123-year history.

Of course, market crashes have also taken place in other months, but the ‘October effect’ has dominated the psyche of investors as major market crashes have taken place in October. If we look from the behavioural finance aspect, we find that it’s the power of mass psychology which makes markets move. This means, if enough investors subscribe to the ‘October effect’ and act on their beliefs, stocks will indeed decline in October and the October effect will become a self-fulfilling prophecy.

However, there’s a section that overlook the ‘October effect’ more as a superstition than a well-documented recurring phenomenon within the marketplace. Some major financial events have also occurred in other calendar months such as the panic of 1837 and a crash that occurred on a Friday in May 1869 (Black Friday).

We are now in this ‘most feared’ month. What will be in store for the investors? Is there anything out that could cause another October crash, a free fall so big that it gets everyone’s attention? These are a few questions which may be at the moment probing the minds of investors who are dominated by the fear of ‘ghost October’.

(The views are of the author & not the institution he works for)

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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