U.S. stocks make a big comeback, but is the danger over?

On Wednesday of this week, the U.S. stock market staged a V-shaped reversal, with major indices turning positive or erasing most of their losses by midday: the S&P 500, which opened slightly higher, quickly turned negative at the beginning of the trading session, fell as much as 1.6% in the early morning, but erased its losses by midday and closed up over 1%. The Nasdaq, which had fallen 1.4% in the morning, closed up over 2%. The Dow, which had fallen over 740 points in the morning, turned positive in the late afternoon and closed up over 120 points. Although the S&P and Nasdaq have rebounded continuously in the first two trading days of this week, the recent two-month trend of the U.S. stock market may not be optimistic based on historical records.

The sharp decline at the beginning of this month has deepened the impression of the September "curse." Mark Higgins, Senior Vice President of Index Fund Advisors and author of "Investing in U.S. Financial History: Understanding the Past to Forecast the Future," also pointed out that September and October have historically been poor-performing months for the U.S. stock market. The worst stock market panics on Wall Street often occur at the end of summer and the beginning of autumn, a pattern that dates back to the 19th century. Some world-famous examples include Black Friday in 1869, the Panic of 1873, and the Panic of 1907.

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Why do U.S. stocks often perform weakly in September and October? Higgins explained that this is a byproduct of the past weaknesses in the U.S. financial system. In simple terms, it is an old problem that existed before the birth of the Federal Reserve a century ago. At that time, the United States was in an agricultural financing cycle, and the U.S. dollar lacked flexibility, making the end of summer and the beginning of autumn particularly unstable periods for the financial market.

Before the Federal Reserve Act was passed by the U.S. Congress in 1913 and introduced the central banking system, the United States had limited ability to adjust the money supply according to market conditions. In the 19th century, the U.S. economy was still heavily dependent on agricultural production. In the first eight months of each year, domestic farmers had limited demand for funds, so the excess funds held by state banks were transported to New York banks or trust companies to seek higher returns. When the harvest season arrived in August, these state banks began to withdraw funds from New York because farmers withdrew funds from their personal accounts to support the transactions needed to transport their crops to the market.

The agricultural financing cycle led to a long-term cash shortage in New York City in the fall. If these cash shortages coincided with financial shocks, the financial system had little flexibility to prevent stock market panics.

Higgins said that compared to the frequency, intensity, and pain of financial panics in the 19th century, the financial market has obviously become more stable after the establishment of the Federal Reserve. Overall, since the Federal Reserve began operations at the end of 1914, the U.S. financial system has become more stable. However, during this period, the Federal Reserve has also made some mistakes, the most embarrassing of which was failing to prevent the spread of bank failures in the 1930s.

Why do the stock markets remain weak in September and October now that the United States is no longer an agricultural country? Higgins believes that people tend to fear things that have happened before, even if they don't remember why the panic occurred. The autumn panic may have occurred many times, making it a self-fulfilling prophecy. In other words, people expect it to happen, and because they expect it to happen, the way people reduce risk at the end of summer and the beginning of autumn makes it more likely to happen. Higgins said that he knows this may sound a bit exaggerated, but it is indeed possible.