October: Its Mythical Significance in Folklore & Finance

Wednesday, 18 February 2015

Folklore is the study those traditional customs, beliefs, stories, and sayings ideas or stories that are not true but that many people have heard or read Some three years ago during my term as President of the Folklore Society, I wrote a paper on “the Folklore of Finance” – a somewhat whimsical paper illustrating the myths of finance through the ages. Since that time there have been a number of papers including a research paper by States Street bank titled "The Folklore of Finance: How Beliefs and Behaviours Sabotage Success in the Investment Management Industry". The paper postulates the view that “the industry faces a new crisis; rather than a financial crisis it is a crisis of faith driven by the '3 Ds' of distrust, dissatisfaction and disintermediation.” The pursuit of investment success has given rise to the biggest impediment the “Folklore of Finance". This is the first of a number of blogs where I shall draw out the relationship between Folklore and Finance. This blog looks at calendar customs in particular October and draws the relationship between the customs of October and the themes month of October in the history of financial markets.

Within the world of Folklore October does not resonate with joy, happiness and expectation. In October "the days shorten and the clocks go back; battles are commemorated, fire celebrations begin and Hallowe’en sees ghosts and witches at large all over the country.” One of October's flowers is the calendula, which symbolizes grief, despair, and sorrow. A Wican chant about October: "Corn and grain, corn and grain, all that falls shall rise again” provides a slightly more optimistic view of the month in the sense that the fruits of the harvest will produce new fruits.

The theory is that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological expectation rather than an actual phenomenon. In fact most statistics go against the theory. If we move to the world of investment, investors may be nervous during October because the dates of some large historical market crashes occurred during this month. Black Monday, Tuesday and Thursday all occurred in October 1929, after which came the Great Depression. In addition, the great crash of 1987 occurred on October 19, and saw the stock prices fall about 20% in a single day.

The legend of ruined millionaires jumping en masse from high windows (only the USA office buildings had high windows in the 1920’s and 1930’s probably began as a small folk tale based on a few isolated incidents. For example Ivar Kreuger, the Match King, was ruined and shot himself in 1932. The tales grew with the telling. Eventually, they became enshrined in the national consciousness of the broking industry and has persisted over more than six decades, and millions of people know" it to be true”, even today. Surprisingly, October has historically provided the end of more bear markets than the beginning. October is probably viewed negatively because investors overlook the fact that the month has been one of the better buying opportunities for contrarians. Crashes or slides, depending how profound investors look at the market declines, in 1987, 1990, 2001 and 2002 marked a turnaround in those years and began long-term rallies. In particular, Black Monday 1987 was one of the great buying opportunities of the last 50 years.

Mark Twain said cryptically that October was a notoriously dangerous month for speculating in the stock market … followed by all the other months!

Stock traders keep an eye on the CBOE Volatility Index, known as the VIX. It rises when investors are fearful. The VIX or Wall Street’s 'fear index' tends to peak in October for the year, but has never set a bottom for the year during October. October is historically a good time to look for a top CBOE Volatility Index, which means lower equity prices in the near term. Looking further ahead, volatility has a habit of calming down as the year winds down to a close. “Santa Claus does tend to bring rallies and quiet periods for stocks in December!”

October 1987 was the month of “the UK, Big Bang”, one of the pillars of the Thatcher government's financial reform programme. Once-dominant financial institutions of the City of London were failing to compete with foreign banking institutions. London remained a global centre of finance but had been surpassed by New York. London was failing to compete globally in financial markets. The Thatcher government claimed that the two problems behind the decline of London banking were overregulation and lack of competition. The solution lay in unfettered competition. Now, there is a debate in the UK about how far it affected the 2007 global financial crisis, the consequences of which still haunt financial markets. Was the 2007 global financial crisis an unintended consequence of the "Big Bang"? Some argue that UK investment banks, previously prudent with their own money merged with commercial banks putting depositors' savings at risk.

Historically, October has been a month of highly diverse events in the financial markets. Good and bad “spins” may be placed on the presentation of these events. Investors and market will draw their own conclusions, which may be categorised as rational, irrational and “old wives tales.”

There is a real challenge in thinking about the present and future roles of the financial service industries: facts are and analysis forever taking a backseat to folklore. This might be no more than a minor irritation. However, financial institutions are facing extraordinary challenges today. Proposals are afoot to drastically restructure the banking industry but old wives' tales still permeate thinks. They are widely repeated, and still inhibit serious discussion.

This article is the first of Robert McDowall's series on Folklore & Finance.