Why Stocks Tend To Decline Or Crash In Autumn: VIX Seasonality And The October Effect

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Why Stocks Tend To Decline Or Crash In Autumn: VIX Seasonality And The October Effect

seekingalpha2023-09-06

Stock market crashes tend to occur in the autumn months, supported by historical data from around the world. Volatility seasonally rises in late summer and is highest in October.Historical reasons for...

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Volatility seasonally rises in late summer and is highest in October.Historical reasons for...</p>\n\n<a href=\"https://seekingalpha.com/article/4633241-why-stocks-tend-decline-crash-autumn-vix-seasonality-october-effect\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4585","symbol_name":"ETF&股票定投概念","start_time":0,"source_url":"https://seekingalpha.com/article/4633241-why-stocks-tend-decline-crash-autumn-vix-seasonality-october-effect","article_id":"2365195080","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/146953037/image_146953037.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2365195080","pubTimestamp":1693974552,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Stock market crashes tend to occur in the autumn months, supported by historical data from around the world. 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Volatility seasonally rises in late summer and is highest in October.Historical reasons for stock declines during the fall can be attributed to factors such as agricultural credit and reduced liquidity after summer vacations.September and October tend to combine for negative average returns, suggesting caution for investors.This year's seasonality may be stronger than average due to the Fed's QT program, a deluge of September corporate debt sales, and student loans kicking back in on October 1st.This doesn't mean that stocks will certainly crash this autumn per se, but the odds are slanted towards a correction far more than usual.Pasticcio October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. - Mark Twain, Pudd'nhead Wilson. 1907. 1929. 1987. 2008. A disproportionate number of major stock market crashes in modern history have occurred in the fall months. Autumn stock market crashes are well-known folklore even among casual stock market watchers. But is it just superstition, or is there something deeper going on that investors can use to their advantage? Mark Twain was an iconic writer but reportedly a lousy investor, although he did amass a decent-sized portfolio by the time of his death. This said, the data tells us that Twain may have been onto something. Why Stocks Tend To Decline In The Fall Historically, stocks tend to have better returns from November to April and worse returns from May to October (\"Sell in May and Go Away\"). In a well-known study on the topic, the effect showed up in 36 of 37 countries around the world, and has been documented in the UK going back to the 1600s. There are a few different hypotheses for why this has historically occurred, with the most prominent one relating to farm credit, where loans were made in spring and paid back (or not) in the autumn. The thinking goes that loans not being paid back from the autumn harvest set the conditions in past centuries for bank failures and tightening credit. A more relevant hypothesis for contemporary Wall Street is because of vacations. Issuance of bonds typically lulls during the summer, followed by a rush of bond sales in September. This pulls liquidity out of the system just like the farm loans of centuries past being paid back did. Similarly, equity volatility tends to be lower during the summer when institutional traders decamp to lake houses, the Hamptons, or Europe. When they get back in the office, volatility quickly rises. In other words, stocks tend to fall in autumn due to worse liquidity than at other times of the year. Since 1928, the S&P 500 (SPY) tends to fall 1.1% on average in September. While there is some chance that this is just random noise, it makes sense that a rush of bond sales, and stock traders returning to digest changing fundamentals would cause poor returns. October is a better month for stocks from a return perspective, earning +0.6% on average, but what October does have is the highest volatility of any month. October is usually a decent month, but when it's bad, it's tended to be really bad. There is no clear \"October Effect\" for returns, but there is a September effect, and the overall combined returns for September and October are negative on average. Seasonality is part of many aspects of life. There are also clear seasonal trends in the market for renting and purchasing real estate. On average, you're likely to go to more funerals in the winter and more weddings in the summer. More babies are conceived during the holidays than at any other time of year. It's often hard to fully comprehend the science, but ebbs and flows from seasonality do exist in many aspects of life. Volatility Rises In Autumn: VIX Seasonality One of the quirks of the stock market- for example, compared to playing poker or betting on sports, is that it often takes years to know whether your strategy is correct or not. Value investors can be tormented for what feels like an eternity before the market decides to appreciate them. However, with volatility, you get more data and it's less random than price. This means it doesn't take nearly as long to know whether your prediction models are right. Predicting volatility can be applied to be effectively as good as predicting returns because you can adjust your bet sizes accordingly and turn risk-adjusted returns into profit. This was the basis of my work years ago on using volatility forecasting to predict the returns of leveraged ETFs. You can use the same inputs (expected long-run stock returns, volatility, cash interest rate) to adjust your stock and bond allocations. October's return history shows that volatility is a necessary condition for market crashes, but it doesn't mean that one will happen on its own. Here we have a rough guide to VIX seasonality historically by looking at the left-hand side of the graph. On the right-hand side, we have 2023. The graph is a few days old but we can see that volatility is starting to rise, despite falling last week going into Labor Day. Vix Seasonality (Topdown Charts via IsabelNet Trading) In essence, this means that the stock market is 30% more volatile in October than it is in July. Moreover, when crises and crashes do happen they tend to happen in September and October. The volatility data does support the idea of an \"October Effect\" in stocks, with increased volatility being a necessary but not sufficient condition for market crashes. There are two clear takeaways from this:  Size down your market bets in September and October. And time your sales for summer and your purchases for winter when possible.  Will Stocks Correct (Or Crash) This Fall? It's no secret to my longtime readers that I believe stocks are significantly overvalued, while cash and bonds are now paying 5.5% or better. I believe that the storm is still coming for stocks, and investors should prepare accordingly by reducing the amount of risk they're taking in their portfolios. Some unique things happening to markets this fall.   A deluge of corporate debt sales, including from US regional banks. September is forecast to hit $120 billion in corporate investment-grade bond sales in the US, up from $78 billion last September. Nearly all of the debt expiring will have low rates, and all of the debt being issued will have high rates. The situation is similar in Europe. Continued drain on liquidity. The Fed will pull $70-90 billion in money out of the system, and while US Treasury deficits are TBD (maybe $100 billion for the month), bond yields just keep marching, with the 10-year up 4.5 bps to 4.22% as of my writing this. Continued rate pressure should push jumbo mortgage rates to a post-2008 record of 7.5% from their current 7.25%, going into the quiet season for sales in autumn. Ouch! Assuming he still has it, Bill Ackman is still winning his giant Treasury short bet. This will also heap the pressure on regional banks. For what it's worth, famed hedge fund manager Michael Burry (made famous by The Big Short) recently bet heavily on a stock market crash. Roughly 43 million Americans are now getting their first student loan bills since 2020, due October 1st. These represent roughly 1% of the total monthly disposable income in the US. It's hard to see how consumer spending doesn't take a hit here because the money will be going straight to deficit reduction. While the truest believers of the American Left are likely to toss these bills in the trash, roughly half of student loan balances belong to doctors, lawyers, and other professionals who understand that student loan cancellation is highly unlikely to happen and that they will need to pay or get charged interest. The Biden administration is working on backdoor cancellation, but the U.S. Supreme Court made it clear in the Biden vs. Nebraska decision that the administration will lose in court again on future attempts to wipe student debt for the same reasons they lost the first case. Even the people who don't pay these student loan bills are likely to reduce discretionary spending in response to late payment notices.  Bottom Line  Stock market volatility tends to be highest in the autumn, and stock returns tend to be worse than average. Stocks may or may not crash this year, but the conditions are prime for at least a correction. As I've previously written, the opportunity cost for playing it safe now is unusually low with the Fed continuing to jack up interest rates while the leading areas of the economy slow.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}