There are two theories associated with stock markets at this time of year — the October Effect and the Halloween Effect. According to the first theory, stocks tend to decline in October, while the second theory postulates a rise in stocks.
But the two theories are more about a psychological expectation than an actual phenomenon. The Halloween Effect is a belief by investors that the six days preceding Halloween are when stock prices tend to increase and stocks are less volatile. On the other hand, the October Effect theorizes the month is a time of stock volatility and investors become nervous or outright fearful about their portfolios, which has been the case this year. Stock market indictators such the New York Stock Exchange, the Dow Jones and the Toronto Stock Exchange have been been up and down during October this year. The volatility has been attributed to the Ebola scare, the International Monetary Fund cutting its forecasts for the world economy in 2014 and 2015, the threat of deflation in the eurozone, a decline in Chinese consumer spending, unrest in the Middle East, and falling oil prices.
Yet, financial experts have been puzzled that the the recent sell-off has snowballed, citing no reason to panic. But people do panic — it’s human nature — and stock market panic has been historically associated with October. Above all, October has witnessed the dates of some of history’s largest market crashes, including Black Monday, Tuesday and Thursday in October 1929, and the great crash of 1987, which occurred on October 19, and saw the Dow plummet 22.6 per cent in a single day. It was on October 29, 1929, when the New York stock market crashed with repercussions that reverberated across the world.
Did anyone see it coming?
There were some people warning that the market was perilously poised to make a dramatic correction, but most were simply too wrapped up in the euphoria of making a quick buck.
Even when the crash struck the New York and then the Montreal and Toronto stock exchanges, many believed it was a temporary setback and happy days would soon return.
As the market plunged that day, Canadian Prime Minister Mackenzie King said: “While a number of people have suffered owing to the (stocks’) sharp decline, the soundness of Canadian securities is not affected. Business was never better.”
All the promises of prosperity just around the corner turned out to be unfounded — the crash would start the Great Depression that raged on throughout the 1930s.
But before the collapse, no one was apparently overly concerned.
“By the summer of 1929,” wrote John Kenneth Galbraith in his book on the crash, “the market not only dominated the news. It also dominated the culture. Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich ... An immediate desire to get rich quickly with a minimum of physical effort.”
And, there were plenty of people willing to speculate. While the market was dominated by large pools of wealthy investors, teachers, retail clerks and others were more than willing to invest their life savings in the market in the hopes of making a quick return. They turned to the financial pages and saw stock such as the Radio Corporation of American, or RCA — the mass appeal of radio made it the social network stock of its day — jump from $10 a share to $573. These big market moves were reported daily on the front pages of newspapers for all to see.
To keep the good news on the front pages, wealthy pools of investors bribed reporters to promote certain stocks and when the stocks were driven up by the purchases of the gullible, the investors cashed in for a quick profit.
But, radio stocks were based upon a false hope. RCA never paid a dividend throughout its building years of the Roaring 20s when it was said that “anything goes.” Radio stock lacked real value and only benefitted from the greed of the many to drive its stock value upward.
What the market was witnessing was the taking on of tremendous debt by all segments of society. This was not without consequences. Prior to the collapse on October 29, 1929, small banks in the United States were failing to the tune of two a day because of the weakness of banking regulations.
Some investors became a little cautious, but even this was thrown to the wind when Charles Mitchell of National City Bank in March 1929 made available $25 million in loans to money markets and the bears returned. Thomas Lamont, a partner with American millionaire banker J.P. Morgan, said, “the future appears brilliant,” as the price of stocks spiralled upward to dizzying heights.
Stock was being bought on margins; that is, an investor could purchase a stock by merely putting down a certain percentage and then guaranteeing to the seller that the full amount would be paid. This buying required that stocks continually rise so that when the margin was called, the seller would be satisfied and a profit could also be made by the purchaser. But what happened was that stocks bought on margin were being used as collateral to buy other stocks — some stocks were being bought for as little as two cents on the dollar — and the seeds of a massive calamity were sown.
In the midst of the crisis, New York-based bankers came up with a scheme of injecting around $130 million to revitalize the market. With the backing of the bankers, Richard Witney, president of the NYSE, put in the first buy order, purchasing US Steel at several points above its market price of $200 a share. This action appeared to stabilize the market. American President Herbert Hoover announced that the business of the nation was on a sound footing.
But on Monday, October 28, the market returned to its slide with over nine-million shares traded. So-called Blue Chip stocks were the most actively traded. By the end of the day, RCA had lost a third of its value.
On Tuesday, October 29, the real crash began. Wall St. Lays an Egg, was the headline in Variety. Thousands found they couldn’t put up enough cash to pay their margins and their assets were liquidated. They were thus wiped out financially. In Toronto and Montreal, 525,000 shares were liquidated. Margin traders joined their New York counterparts in suffering the effects of the crash.
By November 15, the frenzied selling had calmed, but its was too late to rescue those who were driven to financial ruin, including the teachers or retail clerks who had invested in the stock market rather than a pension — soup kitchens sprang up around the world to feed the destitute masses.
Today, financial experts note the pyschological effects of human nature on the stock market, but they also recognize the conditions that led to the Great Depression are not now evident and are actually predicting a climb in stock values by the end of the year. The Halloween Effect has taken hold and investors have reacted positively, resulting in a stock market rally.