Why investors shouldn't be spooked by fears of an October stock-market crash

By Mark Hulbert

The numbers show crashes are no more likely in October than in any other month

The stock market's two biggest crashes have happened in October, but experts say there's nothing special about that month.

You may be able to profit from investors' irrational belief that crashes are especially likely to occur in October.

Their belief leads the stock market to be artificially depressed during October, which in turn means that investments made at the month's low will quite likely show a profit by the end of the year. In 93% of the years since the S&P 500 SPX was created in 1957, for example, it was higher at year's end than at its October low. Its average gain over this two-plus-month period was 7.4%, nearly double the comparable average gain of the other 11 months.

Investor sentiment is a major source of this pattern. Consider the average recommended equity-exposure level among a subset of several dozen stock-market timers who focus on the Nasdaq COMP market. This segment of the stock market is particularly sensitive to changes in retail investors' mood.

Since 2000, as you can see from the above chart, October's average equity exposure to this segment of the market has been just over half that of the other 11 months - 13.6% versus 26.1%. The market's bounce from its October low is therefore a classic illustration of contrarian analysis.

Nothing special about October

Two studies confirm that sentiment, rather than anything fundamental, is the source of investors' low equity exposure in October. One traces to research led by Xavier Gabaix, a professor of economics and finance at Harvard University. According to a complex model developed by him and his co-authors, there is just a 0.06% probability that, at any time in October, there is a one-day crash as deep as 1987's (a drop of 22.6% by the Dow Jones Industrial Average DJIA). The probability of a crash as severe as 1929's (12.8%) is only marginally greater, according to their model, at 0.30%.

Furthermore, Gabaix told me in an email, these miniscule probabilities apply to any month; there is nothing special about October. The fact that the two worst crashes in stock-market history occurred in October is almost certainly nothing more than a coincidence. "There's no special reason, as far as we know, for why [crash odds in] October might be worse" than in other months.

The other study indicating that crash risk is not currently elevated was conducted by Robin Greenwood and Andrei Shleifer of Harvard University and Yang You of the University of Hong Kong. Rather than focus on the odds of a one-day crash, the professors focused on the probability of a 40% decline over a two-year period. State Street Markets, in consultation with Greenwood, have built on this study to produce what the firm calls "U.S. froth forecasts." According to the latest update of those forecasts, the odds of a 40% decline in the next two years is not significantly different than the historical average.

The bottom line: If you were worried about a stock-market crash in the coming weeks, for no other reason than we're about to enter October, you can relax. While the stock market could still do poorly, it won't be because it's October.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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09-18-26 1841ET