Why Sept. and Oct. are tough months in the stock market

Dear Reader,

I’ve been asked a lot in my career, and recently by a young person, “why do crashes tend to happen in October or September?”

September is historically the worst month for the stock market, with October being a close second. Here’s why:

The basic reason is all about how the financial system was originally set up.

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Back in the 1800s, we were still primarily an agricultural economy.

For the first eight months of the year farmers did not need big capital.

But when harvest time came, around September, they would start to ship out all their crops to customers.

So what would happen is they would go to their state banks and pull money out…

And the state banks would go to the New York banks and pull money from there.

And that September pull on capital that originated with farmers drained reserves from the New York banks.

So if something happened – if bad news came, the New York banks and institutions really didn’t have enough money to deal with it. Because all their reserves were wiped out.

So a regular bad market could turn into a big panic without reserves to support the market or fix any banking problems.

Now, this problem started to go away when we created the Federal Reserve banking system in 1913.

But Septembers and Octobers are still kind of funny – people have debated this:

We’re not an agricultural economy anymore – why are Septembers and Octobers still bad? What is going on here?

People wonder if it’s a kind of “boogeyman” from the past – that historically people though Septembers and Octobers were really bad so they still should be bad.

That’s one answer.

The other answer is this – and this is my personal opinion as well – there are a few things going on this time of year:

For one, every four years we have a presidential election right after September and October and there’s a lot of traffic going into that.

We’ve also just come off the summer months. You know the expression, “sell in May and go away.”

So people are coming back into trading, you have elections, the Fed really starts to push out rates in September, you have the new year coming up as well.

So right around September, October, November – just the way the calendar is set up has given us turbulence.

So, just wanted to answer that question since most folks don’t know.

For those of you who are history buffs and love this stuff like I do, now you have the origin story on why September and October have historically been tough months in the stock market.

“The Buck Stops Here,”

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