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"October"

The month of October has an eerie effect on the markets. Most participants in the stock market still remember October 1987 when the Dow dropped from 2641 (10/2/87) to 1738 (10/19/87) with most of the fall in one very black Tuesday.

When we look back in history however, October is not the worst month. In the stock market eight of the twenty worst (biggest) daily drops have occurred in October. But, on the bright side, all eight of those turned out to be bottoms for the market for many months thereafter. In fact, in the past ten years October has taken the stock market up more times than it has taken it down.

September is actually the worst month historically. There is some basis in history for October (or September) to be harbingers of bad times for the market which started well before 1987. Before the Federal Reserve System was established to smooth cash flows through the banking system, the fall season created a serious drain of liquidity because with the harvest money flowing to the country banks as crops were bought and sold.

As a point of curiosity, January is the best month and November to April overall is the best time for the markets which is normally attributed to company awarded bonuses being reinvested.

Of course neither the harvest nor the moon has much to do with the nervousness in either the stock or fixed income markets this year. The Federal Reserve has worked hard to reduce any concern about the banking system caused by Y2K. Most participants expect little or no disruption in the financial institutions. It is not this nervousness that is appearing. Instead reality regarding inflation and earnings will keep the markets volatile throughout this supposedly "jinxed" month.

Since the last Fed tightening of policy on August 24^th, the markets have seesawed in sentiment about whether the Federal Reserve will tighten rates again before the end of the year. The Fed started this spring announcing the ‘bias’ of the Fed after each FOMC meeting. Although the ‘bias’ does not guarantee the next move by the Fed – the market is strongly listening to each ‘bias announcement’. At the FOMC meeting on October 5^th, the Fed was not expected to move because our US economic growth was not showing significant inflation. However, the Fed announced on the 5^th that the Fed Funds rate would remain the same but changed their bias to tightening from a neutral position.

This bias has the market spooked. PPI, CPI, payroll, NAPM and other economic indicators are scrutinized for unexpected inflation or growth. With a stated bias, every indicator takes on exaggerated influence and causes severe volatility. PPI has already shown signs of inflation in the economy and CPI would be expected to follow through on this trend. With earnings being questioned in the stock market money will continue to ebb and flow between markets until a firm trend line is established.

But true to October form this year the market tone which comes with any strong economic indicator trick will not result in a treat for investors.