New York — What is it about October and stocks?
The month that brought the 1929 crash, Black Monday in 1987 and other midautumn market crises delivered its worst monthly performance in 21 years.
And not even the best week in 34 years could keep the market from suffering another terrible October this year.
Despite another big advance on Friday, paper losses in the U.S. stock market came to $2.5 trillion for the month, according to the Dow Jones Wilshire 5000 Composite Index, which represents nearly all stocks traded in the United States. The 17.7 percent decline was the worst since the 23 percent drop in October 1987.
The Dow Jones industrials rose 144 points on Friday, giving the market its only back-to-back gains of the month and its best week since mid-October 1974.
But it was a trick-or-treat month. Fear coursed through the markets in a way that hadn't been seen for more than two decades, causing rushed selling by everyone from middle-class investors to multibillion-dollar hedge funds.
The Dow plummeted 2,400 points in the month's first eight trading days, and by Friday there were only three days when it didn't finish the session with a triple-digit movement.
October was the month when the credit crisis that started squeezing Wall Street institutions earlier in the fall spilled into the mainstream, hampering banks' ability to lend and consumers' ability to borrow, and ultimately taking huge chunks out of retirement savings and other stock funds.
Meanwhile, the ripple effect spread to the rest of the world economy and caused similar carnage on stock markets from London to Singapore and beyond amid fears of a deep recession.
The Dow finished down 14 percent in October, and world markets were worse. As of Thursday, it was the worst month on record for stock markets in developed countries as measured by the MSCI World Index, which lost 19 percent of its value. Emerging markets suffered even more, shedding 29 percent.
"It seems like it all came together in October," said Denis Amato, chief investment officer at Ancora Advisers. "You had people recognize that things were worse than normal with the credit crisis. It just sort of collapsed all into that one period."
Experts aren't sure why October has been such a cursed month for stock market meltdowns - although September has registered the biggest declines of any month historically.
But October's reputation is well known on Wall Street, as is the fact that stocks perform much worse during the six-month period ending with October than during the rest of the year. Since World War II, the Standard & Poor's 500 index has gained 7 percent annually from November through April and just 1 percent from May through October.
Deborah Lucas, professor of finance at Northwestern University's Kellogg School of Management, thinks it's unfair to suggest that individual investors panicked or acted irrationally in the past month.
"There was a basis for the fear," she said. "There was a desire to put their money somewhere safer. If everyone on Wall Street has rushed out the doors, why is it that we tell everybody on Main Street they shouldn't panic?"
The seeds of October's losses were sown in September. Investors already were feeling jittery about the deteriorating financial outlook as the consequences of the collapse in housing prices crept into every corner of the economy.
The news got stunningly worse on Sunday, Sept. 14 - a pivotal day that set stocks' meltdown in motion. That was the day the government refused to bail out Lehman Brothers Holdings Inc. after a weekend of intense negotiations, leaving the investment house to file for bankruptcy the next day.
The fallout from the largest bankruptcy in U.S. history was enormous and more than government officials foresaw. It was the second failure of a giant investment bank, following Bear Stearns Cos. earlier in the year, and it removed an important foundation from an already-stressed financial system.
Banks did not want to lend to anyone, which threatened such basic business operations as making payroll and made it difficult for consumers to get auto or home loans.
It became clear something had to be done or the economy would collapse in the absence of lending. But it proved too late for even a $700 billion emergency rescue of financial institutions to stop the market carnage.
Low and lower
The House's rejection of the bailout on Sept. 29 sent the Dow tumbling a then-record 777 points and set the stage for an even worse October.
Congress passed the rescue package on Oct. 3. But by then a global alarm had been sounded about the likelihood of a punishing worldwide recession, and mutual funds, pension funds, hedge funds and individuals began fleeing the market. The Dow plummeted from a high of 10,882.52 on Oct. 1 to the month's in-trading low of 7,882.52 on Oct. 10.
Rob Lutts, chief investment officer at Cabot Money Management in Salem Mass., sees the stress etched on people's faces when he is at the YMCA or elsewhere around town.
"They're hurting. Their 401(k) is down," he said. "There is more hand-wringing when I talk to people now than I have seen in several cycles."
The Dow recovered and then plunged lower again during a month that set records for volatility and for the biggest point losses and gains during a single session. On Monday the blue-chip index closed at a 5 1/2-month low of 8,175.77, but it never closed below 8,000.
The gains on Thursday and Friday left it up a whopping 11 percent for the week. But the Dow remains down 34 percent from the high set just 12 1/2 months ago.
With fear having subsided, the market's future now hinges on the health of the world economy. Governments worldwide have followed Washington's lead in taking unprecedented action to prop up the financial system, but it's not clear what impact that will have in a global recession.
"The global policy action has been enormous," said Joe Balestrino, a portfolio manager at Federated Investors Inc. "The system is now, I'd say, open for business. Now the question is, will it occur?"