MarketInsight | Navigating the Mississippi and the stock market
The Mississippi River winds a treacherous and ever-shifting path through the heartland of our great country. Only experienced river pilots could navigate this great highway of our past. Samuel Langhorne Clemens grew up working this river. He took his pen name, Mark Twain, from a river pilot’s signal for safe passage. A stick would be put in the water to find the bottom of the river and if the water fell between two marks, the measurement would be announced as “Mark Twain.”
Twain had a joke about the stock market.
“October,” he wrote, “This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
It is striking that, even in Twain’s time, his audience already knew that October was a dangerous month. The joke doesn’t work unless the audience knows October is dangerous. We know about October because of October 1929, October 1987, and October 2008. Mark Twain died in 1910. There was a big crash in 1907 that also struck in October, but Twain wrote his famous line about crashes in 1894. The 1907 crash, often called the “Knickerbocker Panic,” drove stocks down 50 percent in three weeks and led to the formation of the Federal Reserve.
The most famous stock market crash prior to 1894 occurred in September of 1869. It was the original “Black Friday.” Jay Gould was attempting to corner the gold market and he had inside help from the Treasury. Everything went awry when the Treasury sold $5 million of bullion, driving the price down $25 per ounce and ruining many speculators. Historically, more panics or crashes have occurred in September than in October, yet it is October that often leaves investors quaking with fear. I do not know why. I would ask Mark Twain, but he has been dead for over a century.
There is a difference between a correction and a crash. Corrections tend to be short, violent events within a bull market. They tend to come out of nowhere and end quickly. They are, in essence, an interruption in a bull market. A Wall Street adage suggests that a bull market is a long escalator ride up and a correction a short elevator ride down. On the other hand, crashes tend to mark the end of a bull market. While they often begin with a sharp decline, there is no immediate return of the bull. The market tends to go down day after day for months or even years as it did in 2008 – 2009, 2000 – 2002, and 1929 – 1931.
We just experienced a sharp decline in the beginning of February. Most experts think it is just a correction within a longer, broader, bull market. I concur. At the time of this writing, it is too early to tell for sure. Well into 1930, President Herbert Hoover kept insisting that prosperity was right around the corner. He was wrong. If the market continues to decline, if the pattern changes to one where the market declines slowly day after day, then we are in a bear market and we need to take actions to protect ourselves. If, on the other hand, the market begins to move up slowly over time, then this is just a short correction and it presents an opportunity.
Smart investors will not panic. They will, instead, look for opportunities.
Scott A. Grant is President of Standfast Asset Management in Ponte Vedra Beach. He welcomes your comments or questions at firstname.lastname@example.org.