October Effect

The October effect is a perceived market anomaly that stocks tend to decline during the month of October. The October effect is considered to be more of a psychological expectation than an actual phenomenon, as most statistics go against the theory. Some investors may be nervous during October because some large historical market crashes occurred during this month.

The events that have given October the reputation for stock losses have happened over decades, but they include: The Panic of 1907, Black Tuesday (1929), Black Thursday (1929), Black Monday (1929), Black Monday (1987).

Black Monday, the great crash of 1987 that occurred on Oct. 19 and saw the Dow plummet 22.6% in a single day, is arguably the worst single-day decline.

The other black days, of course, were part of the process that led to the Great Depression—an economic disaster that stood unrivaled until the mortgage meltdown nearly took out the whole global economy with it.

The October effect is the perception that stock markets decline during the month of October, and it is classified as a market anomaly.

The October effect is considered to be more of a psychological expectation than an actual phenomenon, as most statistics go against the theory.

Proponents of the October effect, one of the most popular of the so-called calendar effects, argue that October is when some of the greatest crashes in stock market history, including the 1929 Black Tuesday and Black Thursday and the 1987 stock market crash, occurred.

While statistical evidence doesn’t support the phenomenon that stocks trade lower in October, the psychological expectations of the October effect still exist.

The October effect, however, tends to be overrated. Despite the dark titles, this seeming concentration of days is not statistically significant. In fact, September has more historical down months than October. From a historical perspective, October has marked the end of more bear markets than the beginning. This puts October in an interesting perspective for contrarian buying. If investors tend to see a month negatively, it will create opportunities to buy during that month. However, the end of the October effect, if it ever was a market force, is already at hand.

What is true is that October has traditionally been the most volatile month for stocks. According to research from LPL Financial, there are more 1% or larger swings in October in the S&P 500 than any other month in history dating back to 1950. Some of that can be attributed to the fact that October precedes elections in early November in the United States every other year. Oddly enough, September, not October, has more historical down markets.

Investopedia