What's Causing Alarm Among Wall Street Investors

October 4, 2023
Stephanie Bedard-Chateauneuf
Wall Street is in a state of unease this October as the Dow's significant drop and the Fear & Greed Index's "Extreme Fear" reading of 14 raise concerns amid rising bond yields, government turmoil, geopolitical risks, and the specter of the "October Effect," yet historical trends suggest that the month's reputation may not be as dire as perceived.

October often triggers unease on Wall Street, and this week's market turbulence is no exception. On Tuesday, the Dow plummeted by 454 points, or 1.3%, marking its most significant drop since March and causing it to dip into negative territory for 2023. CNN's Fear & Greed Index, which monitors seven key market indicators, hit a worrisome "Extreme Fear" level of 14, its lowest point since the previous October.

As investors brace for bank earnings and an upcoming Federal Reserve meeting, several factors are contributing to the sense of apprehension:

Rates and the Fed: The stock market is feeling the pressure from a surge in corporate debt sales and rising bond yields. Elevated bond yields make safer assets more attractive to investors, potentially diminishing the allure of stocks. Moreover, robust job data has heightened concerns that the Federal Reserve might opt to maintain higher interest rates for an extended period. This could impede corporate profitability and drag down stock valuations.

Government Dysfunction: The political turmoil within the U.S. Congress is adding an extra layer of unpredictability to the markets. Recent events, such as narrowly avoiding a federal government shutdown over budget disputes, have contributed to market jitters. Furthermore, House Republicans' move to remove Speaker Kevin McCarthy from his role due to his cooperation with Democrats in averting the shutdown has added to the instability. Rating agency Moody's has even cautioned that a government shutdown could be "credit negative" for the United States, and prolonged political discord might potentially lead to a credit downgrade. Additionally, around 43 million Americans are set to face their first student loan bill since 2020 in the coming week, which could dampen consumer spending.

Geopolitical Risks: Ongoing conflicts, such as Russia's war on Ukraine and persistent tensions between the United States and China, are contributing to elevated geopolitical risks. Meanwhile, oil prices continue to hover near their highest levels in over a year.

However, some analysts attribute the market downturn to the "October Effect," a historical pattern of stock market declines during the month. While statistical evidence doesn't conclusively support this phenomenon, the superstition surrounding it can become a self-fulfilling prophecy.

It's worth noting that when viewed over the long term, October's performance isn't as dire as its reputation suggests. As the famous writer Mark Twain humorously quipped in 1894, "October. This is one of the peculiarly dangerous months to speculate in stocks." He then went on to whimsically add, "the others are July, January, September, April, November, May, March, June, December, August, and February." In essence, no particular month has a monopoly on stock market unpredictability.