The number one hit on the U.S. Billboard Hot 100 in January 1973 was Stevie Wonder’s “Superstition”. A catchy and simple song, Wonder recounts various superstitions people act on, or believe in, before launching into a chorus that reminds us it’s better to focus on facts over feelings, fiction, or hocus pocus.
When you believe in things
That you don’t understand
Then you suffer
Superstition ain’t the way, yeah
Many of us are prone to superstitions and it’s not just breaking mirrors or walking under ladders. They can also crop up in investment and economic spaces. You might assume people who work with and have access to large sets of data would be immune, but for some reason, many people in the financial space still feel superstitious about certain times of the year. Particularly October, specifically because a couple of market crashes occurred in October.
In early October, Shane Oliver, AMP’s long-term chief economist, recounted how he’d always feel uneasy at the back end of the year. Mostly due to the October ‘87 market crash.
In the fourth year of my career, the share market crashed. In one day, US shares fell 20%, and the day after Australian shares fell 25%. From the months just before to the months just after US shares had a total 35% fall and Australian shares had a 50% fall.
So, over the space of a few months, $1000 invested in the Australian share market had fallen in value to $500. Some lost their fortune including an older friend of mine (because he wasn’t diversified) who had to come out of retirement. The 1987 share market crash – with the one day falls on 19 October in the US and 20 October in Australia and the peak being in August/September 1987 – have become a part of share market history along with events like the 1929 crash, the 1973-74 plunge, and the GFC.
But each October (or starting in August), many including me have a certain apprehension about markets.
Whether this is outright superstition, the power of a bad experience, or Shane just needing a familiar topic to fill a column without checking the data, we’ll never know. But every year leading into October, the market crash reminder articles come out. And constantly bringing up this stuff has an effect.
We recently had a client who boldly told us a similar thing, “markets tend to sell off going into the end of the year,” they then asked the question, “are we planning to do anything?” When we pushed further, the client couldn’t pinpoint where they’d picked it up. They’d heard someone, somewhere, say it, and then committed it to memory as a fact.
First up, how bad was this October? Well, it wasn’t great. Down -3.85% in Australia and down -2.1% on the S&P 500 in the US. But what about the longer term? Any reason for Oliver to continue his pessimism or be superstitious post the October ’87 crash? Not really. The average October return from 1988 to 2022 was 0.98% in Australia and 1.66% on the S&P 500.
What about that sell-off going into the end of the year?
In Australia, the average of each quarter’s returns since 1980 are as follows.
The fourth quarter isn’t the best, neither is it the worst since 1980. Interestingly, if we remeasured post the 87 crash it would be the best quarter by 0.68%, but even with that in mind people still somehow believe that the end of the year is a poor period for returns.
In the US the average of each quarter’s returns are as follows.
S&P 500 data stretches back to 1926, and on average, the fourth quarter is conclusively the best quarter, so definitely no evidence that anyone should be superstitious about the end of the year.
Despite a couple of notable crashes, October isn’t up there with broken mirrors, stepping on cracks in the pavement, opening an umbrella inside, or Friday the 13th. And neither is the end of the year, but these superstitions persist about such periods being bad for returns.
Now, after we’ve written a very rational article on how silly it is to be superstitious about times of the year, we have an admission: we delayed publishing it until after October was over. Just in case we jinxed ourselves and the market did something crazy!
Proving superstitions are very real and hard to overcome.
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