Are We Headed For Another October Stock Market Crash Like 1929?

October is back again with its annual host of frightening characters, none of which are more predictable than Permabears who are calling for another market crash:

“Rich Dad, Poor Dad” Author Robert Kiyosaki made media waves this month by saying “The biggest crash in world history is coming this October”.

On the surface that sounds pretty scary. But when you reflect on his past predictions, it looks more like he’s using a classic gambler’s fallacy of doubling his bet size even when the losing streak intensifies.

Of course, you can be right for the wrong reasons, and wrong for the right reasons, which is what makes forecasting such a difficult (or useless) exercise. Jeremy Grantham of GMO is guilty of similar calls lately (going on 10 years now 🤷‍♂️).

Their reasoning? The economy is too good, and inflation is here.  

Making stock market calls is a well-documented fool’s errand. However, if you’re committed to calling a market crash, October would be the month to do it:

The undisputed spookiest month is tied with May for the deepest average monthly pullbacks in history. Octobers’ “Black Monday” Crash of 1987 (-22%) and Crash of 1929 (-40%) pull down the averages quite a bit. Like every golfer knows, a few triple-bogey outlier holes can ruin an otherwise good scorecard.

Here’s the kicker though: Even though the average historical drawdown in October is deeper, the average overall return is still positive:

Put another way: Most years’ October returns have been positive.

But when it’s been negative, it’s more painful.

It would have been hard to predict, but the market is still having a banner year. The S&P 500 made 50 all-time highs this year. The market is, as of writing, only of its late summer highs by roughly 6%. In fact, this recent market fit was the first 5% peak-to-trough pullback since last November.

Is there room for a more substantial pullback? Of course!

We haven’t seen the S&P close with a losing year for over a decade. But with a 15% gain thus far, It’s just not likely to happen in 2021.

Several drawdowns have stopped short of becoming 10% corrections with fresh buyers. Whether it’s the Evergrande crisis, fed tapering discussion, or a pundit’s big ideas, it seems like there’s just too much money, too many stock buyers in the system for another bear market right now. Every dip seems to be bought quickly.

While there’s always bad news out there, there are a few catalysts for continued growth:

The economic stimulus is about to get a fresh infusion of $1-3 Trillion in the form of an infrastructure bill.

The tax proposal isn’t as extreme as some people expected.

Unemployment extensions have run out, people are filling jobs and unclogging the supply chain.

The economy is slowly reopening despite the Covid Variants.

Companies are still seeing increased demand for goods and services, and price increases (aka profits) look permanent.

With the relative strength of the economy and ample money in the system, it would be difficult to foresee another 1929 crash, or Black Monday this October. It’s likely the next stock market crash wouldn’t be linked to the economy, rather, a Black Swan event.