The October Effect is the belief that stock markets tend to decline during October. Despite these apprehensions, statistical evidence suggests otherwise, and the phenomenon appears to be more psychological than actual.
October’s reputation comes from historical market crashes during this month, notably the Panic of 1907, the 1929 crash’s Black Tuesday, Thursday, and Monday, and Black Monday in 1987. Surprisingly, despite these events, October’s long-term market performance has been positive.
Key Takeaways
- The October Effect is considered a market anomaly, predicting stock market declines in October.
- It parallels other calendar anomalies, such as the September Effect and Santa Claus Rally.
- It is primarily a psychological expectation due to significant historical events, rather than factual evidence.
- Over the past century, October has tended to be a net positive month for stock markets.
- The October Effect seems to have diminished as a modern market phenomenon.
Understanding the October Effect
October is feared for past significant market crashes. Advocates of the October Effect often mention the severe market crashes of 1929 and 1987. However, statistics generally do not support that stocks consistently trade lower in October.
Most bear markets have concluded in October rather than started, positioning October as a prospect for contrarian buying—buying when others expect declines can yield significant profits.
October Crashes
Despite October’s positive inclinations, it is historically the most volatile month for stocks, with multiple 1% or larger swings within the S&P 500 since 1950.
Notable October market events:
- The Panic of 1907
- Black Tuesday (1929)
- Black Thursday (1929)
- Black Monday (1929)
- Black Monday (1987)
Interestingly, catalysts for these crashes often happened sooner than October, as in 1907, when confidence in trust companies eroded gradually before October’s culmination.
The Disappearance of the October Effect
Data contest the claims that October has been disadvantageous for stocks. Despite events labeled with ominous monikers, various market crashes outside October don’t attribute the name “Black.” Consider the dotcom crash and 2008 financial crisis, which weren’t burdened with such a label.
Moreover, as markets globalize, reliance on calendar-driven market attitudes has lessened. The declining October Effect signifies that a mix of old events, psychological biases, and media portrayal created the myth.
Is the October Effect Real?
Evidence negates widespread October declines, but historical perception maintains some investor fear. Significant past events like 1987’s crash foster a negative outlook for October due to psychological biases rather than data.
Are Stocks Usually Down in October?
No. Since 1928, October has shown average stock growth over 0.6%, disputing the belief that it is predominantly negative for stocks.
Which Has Been the Worst Month for Stocks Historically?
September is generally worse, averaging a 1% market decline over the last century, rather than October.
The Bottom Line
The belief that stocks fall in October, influenced by historical crash reflections, lacks substantial evidence. In fact, October has often been a positive month for stocks. The myth of the October Effect doesn’t align with the efficient functioning of markets and shouldn’t direct investment decisions.
Related Terms: September Effect, market anomalies, trading psychology, contrarian investing, historical market crashes.
References
- Federal Reserve History. “Stock Market Crash of 1987”.
- Library of Congress. “The Black Monday Stock Market Crash”.
- Stock Trader’s Almanac. “September Almanac: Worst Month of the Year Since 1950”.
- LPL Research. “Is October Really Scary?”
- Federal Reserve History. “The Panic of 1907”.
- Federal Reserve History. “Stock Market Crash of 1929”.
- Forbes. “Dow On Pace For Best October Ever, Second-Best Month In 30 Years”.
- Yardeni Research. “Stock Market Indicators: Historical Monthly & Annual Returns”, Page 1.
