Stock markets have a long history of being abnormally risky in September and October. Out of 10 months in which the S&P500 ended at least 15% lower than when it started, 3 were in October. Out of 31 months in which it ended at least 10% lower, 12 were in September or October.
I used to guess that this was due to the onset of seasonal affective disorder. That explanation was a bit unsatisfying, because SAD seems likely to be predictable enough that the effects could be mostly smoothed out by smart investors.
After looking at the 1957 pandemic and its possible effect on the stock market, I wondered whether infectious diseases was a better explanation.
I did a crude analysis of the correlations between flu deaths and stock market changes. I didn’t manage to get as good a dataset as I’d hoped for, and ended up settling for the monthly US data for selected seasons (12 in the period 1941-1976) in table 1 of Trends in Recorded Influenza Mortality: United States, 1900–2004.
I looked at correlations between monthly increases in flu deaths per 100,000 people and the monthly change in the S&P500. I was able to find a large effect, but it disappeared when I left out the 1943-1944 season (which was by far the worst season in that time period, yet wasn’t labeled as a pandemic).
Either there’s no effect in that time period, I don’t have detailed enough data, or the effects precede deaths by enough that the death data aren’t helpful.
I was mostly thinking that diseases might have affected the market via effects on investors moods or liquidity preferences, so I wasn’t assuming there would be much discussion of the topic. The paper The Unprecedented Stock Market Reaction to COVID-19 investigated whether newspapers mentioned the topic, and concluded:
In the period before 24 February 2020 – spanning 120 years and more than 1,100 jumps – contemporary journalistic accounts attributed not a single daily stock market jump to infectious disease outbreaks or policy responses to such outbreaks. Perhaps surprisingly, even the Spanish Flu fails to register in next-day journalistic explanations for large daily stock market moves.
So, after a fair amount of research, I still don’t have good evidence about what’s causing the September / October volatility.
P.S. For some strange reason, January is an unusually safe month, with no declines of more than 9% in the S&P 500.
P.P.S. VIX futures are saying that the S&P500’s volatility around late October will be 3.6 points higher the average of August and December volatilities. That compares to an average of 0.86 points higher (and a maximum of 2.1) over the prior 11 years in which VIX futures have been available (all of these numbers come from prices near July 20 of the relevant year).
So the markets expect something unusual this October. Something more surprising than they expected during the prior two presidential election years. Does anyone know whether this risk is due to weather-related pandemic risk or due to political risk?