Witch of October is here: Short-term pain leads to long-term gain

THE month of October strikes fear in the hearts of many Wall Street veterans — and for good reason. Over the last 123 years, seven of the 10 worst days in US stock market history occurred during this seemingly haunted 31-day stretch.

But there’s nothing supernatural about these October scares. They are the remnants of the 19th century agricultural financing cycle. During the 1800s, farmers harvested and shipped their crops to market in the fall, paying for the operation with large withdrawals from their local banks. These banks, in turn, withdrew funds from larger New York City banks and trusts to replenish their reserves, which made Wall Street financial markets especially vulnerable to panics. Even after the United States transitioned to an industrial economy and re-established a central banking system in the early 1900s, the memories of past Octobers seem to have conditioned investors to erupt in panic out of habit. October 2022 may be just the latest manifestation.

Costs of closet tactical allocation

Panic is the mortal enemy of long-term investors, especially in volatile markets, but that does not mean that we should sit idly by in the face of another October scare. At times like these, the late David Swensen‘s observation in his classic Unconventional Success is worth remembering: “Perhaps the most frequent variant of market timing comes not in the form of explicit bets for and against asset classes, but in the form of passive drift away from target allocations.”