Welcome to Extreme Investor Network, where we take a deep dive into the world of finance to provide you with unique insights and information that you won’t find anywhere else. Today, we are exploring the age-old question: why are September and October historically weak months for stocks?
To shed some light on this topic, we spoke with Mark Higgins, senior vice president at Index Fund Advisors and author of the book, Investing in U.S. Financial History: Understanding the Past to Forecast the Future. According to Higgins, the trend of weak stock performance in September and October can be traced back to the 1800s, with significant panics like Black Friday of 1869, the Panic of 1873, and the Panic of 1907.
But why do these months specifically spell trouble for the stock market? Higgins explains that prior to the introduction of the Federal Reserve Act in 1913, the U.S. financial system was plagued by a lack of flexibility in adjusting the money supply. The agricultural financing cycle played a significant role in creating cash shortages in late summer and early autumn, leading to increased market volatility during these months.
The passage of the Federal Reserve Act in 1913 marked a turning point in providing stability to the financial markets. With the Fed acting as a lender of last resort during financial crises, the U.S. financial system became more resilient to panics and shocks.
Despite the shift away from an agricultural-based economy, the fear of September and October panics still lingers in the market. This lingering fear may even contribute to a self-fulfilling prophecy, as investors behave in ways that can exacerbate market downturns during these months.
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