October: The cruelest month for stocks

This month has been one of the worst-ever for stocks, with the S&P's declines outpacing October 2007 and 'Black Monday.'

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By Aaron Smith, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- October can be the cruelest month for stocks, and this October is shaping up to be the cruelest of them all.

As of Monday, the S&P 500 had plunged 285 points in October, its worst monthly point decline ever. The index has dropped 27.2% so far - the biggest monthly percentage decline in 57 years and its second-worst performance ever.

"October is always the scariest month of the year," said David Wyss, chief economist for Standard & Poor's. "It's when most of the stock market crashes and the bottoms occurred. So it's living up to its reputation. It's going to be a really bad October."

This month's S&P performance has been so abysmal that it has already outpaced the infamous month of October 1987, when the index plunged 21.76%. This was primarily from declines on the "Black Monday" of Oct. 19.

"At the time, [the crash of] 1987 seemed very bad, a one-day shot that was just so terrible," said Robert Brusca, chief economist at Fact and Opinion Economics. "But it was one day. It turned out to be a great buying opportunity, actually."

On Monday, the S&P's monthly decline surpassed the second-worst percentage plunge of all time, 25.04% on March 1938. The worst-ever percentage decline happened in the early part of the Great Depression, in September 1931, when the S&P 500 lost 29.94%.

But Peter Boockvar, equity strategist for Millar Tabak, said that while the percentage decline of October 2008 is similar to "awful" drops seen in 1987 and the 1930s, the similarities end there. "The economic backdrop was a little different with each scenario," he said.

This month has brutal for the markets, which have suffered under the weight of a deteriorating housing market, an ongoing credit crisis, sluggish profits and falling commodity prices. Worst of all, economists say, is that there seems to be no end in sight.

"A combination of negative outlook and uncertainly is toxic for stock markets, and you've got both of those factors on steroids right now," said Jared Bernstein, senior economist with the Economic Policy Institute.

Trading has been extremely volatile, and recessionary fears have spread like a virus, roiling markets around the world.

"The real problem is a total lock-up of the credit markets," said Wyss. "I've never seen that before, just the inability for firms to borrow money."

The market malaise is in spite of the U.S. government's sweeping actions to kick-start the economy, including Congressional approval of a $700 billion bailout for Wall Street firms, including buying stakes in ailing banks, and the Federal Reserve agreeing to buy businesses' commercial paper and lowering the federal funds rate by half a point, to 1.5%.

"This is clearly worse than 1987," said Brusca. "1987 was a one-day wonder. We were shocked, but we recovered quickly from it."

Brusca said that current troubles have more of a pervasive, lasting impact than in the 1980s because more stock is tied up in hedge funds and 401(k) retirement plans. This makes the equities less liquid than day-trader stocks because hedge funds have specific exit rules, and investors are often barred from adjusting their 401(k)s more than quarterly. Also, more people are investing than they were 20 years ago, so stock declines have more of a widespread impact.

Many economists believe the economy is in a recession, while noting that the current problems pale compared to the Great Depression, which began in October 1929.

"1929 was an economic disaster," said Brusca. "In the Depression, remember, one in four people was unemployed."

That's compared to the current nationwide unemployment rate of 6.1%.

But as some economists are quick to point out, the current downturn isn't over yet, and no one knows how bad it will be.

"We've got a ways to go," said Wyss. "I don't think it's over. We need to get the election over with. We need to see banks start lending money again." To top of page

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