The October Effect: Just What Is This Mystery?

Just what is this mysterious “October Effect”?

During the month of October, stock prices tend to go down due to the “October effect,” which is a widely held belief. As most statistics contradict the October effect, it is generally accepted that it is more of a psychological expectation than a genuine phenomenon. The historical record shows that several significant market crashes occurred in October.

However, like the September effect (which also forecasts weaker markets in October), the evidence for the existence of the October effect is not particularly strong.

Despite the fact that it was the month of the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987, when the Dow fell 22.6% in a single day, October’s 100-year history has been net positive (and remains arguably the worst single-day decline in market history on a percentage basis).

• Known as a market anomaly, the October effect is the widespread belief that October is a bad month for stocks.
• It’s a quirk of the calendar, like the September effect and the Christmas rally.
• Most statistics disprove the October effect, leading many to believe it is more of a psychological expectation than a real phenomenon.
• Over the past few decades, the October effect and other calendar anomalies have seemingly faded away.
• In fact, over the course of the last century or more, October has typically functioned as a net positive month.

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The October Effect: What You Need to Know

One of the most widely discussed calendar effects is the “October effect,” which states that the most significant stock market crashes, such as “Black Tuesday” and “Black Thursday” in 1929 and the “Trojan Horse” crash of 1987, all occurred in October.
The October effect, the belief that stock prices will fall in October despite the lack of statistical evidence, is still widely held.

October’s impact is often exaggerated. There is no statistically significant correlation between the number of days with morbid titles and the actual number of days with morbid titles. In fact, September has traditionally had more slow months than October.

Historically, more bear markets have ended in October than begun that month. In light of this, October is a potentially good time to buy on the inverse trend. An unfavorable outlook for a given month among investors could lead to bargains for savvy buyers. The stock market’s performance in October has been positive on average for at least the last century, so the end of the October effect is near.

The October Collapse

What we do know is that historically October is the month with the highest stock market volatility. LPL Financial found that going back to 1950, October saw more monthly changes of 1% or more in the S&P 500 than any other month.

The fact that every other year in the United States elections take place in early November may account for some of this phenomenon. Historically, October has fewer down markets than September does.

Nonetheless, October has also seen its share of historic stock market crashes. Events like these have accumulated over decades to give October a bad rep in the stock market.

The Panic of 1907
Black Tuesday (1929)
Black Thursday (1929)
Black Monday (1929)
Black Monday (1987)

Moreover, the events that triggered the crashes of 1929 and 1907 occurred in September or earlier; the subsequent reactions were simply delayed.

By March of 1907, everyone was terrified. Trust companies lost more and more support from the public all through the year, as skepticism about their lack of regulation only grew. Public doubt reached a fever pitch that October, leading to a mass exodus from the trusts.

The Federal Reserve banned margin-trading loans and increased interest rates in February 1929, marking the beginning of the 1929 Crash.

Despite forecasts of a negative October effect, the U.S. stock market actually had one of its best months ever in October 2022, with the Dow Jones rising by about 12% and the S&P 500 by nearly 6%.

How The October effect Vanished

The October effect is not supported by the data. Taking into account all monthly returns for the month of October going back more than a century, there is no evidence to support the claim that October is a losing month. The name “Black Monday” has contributed to the widespread recall of historically significant events that occurred in the month of October. Crashing markets are not unique to October.

Many modern investors recall the dot-com crash and the financial crisis of 2008–2009 more vividly; however, neither of these events was associated with a “black” label for the month in which it occurred.

It was not reported as a new Black Monday when Lehman Brothers went bankrupt in September despite the fact that this event marked a significant increase in the global stakes of the financial crisis.

Whatever the reason, black days are no longer front and center in the news, and Wall Street isn’t exactly clamoring to bring back the practice, either.

In addition, today’s investors come from all over the world and don’t all share the same calendar perspective. Given that the October effect was founded on little more than a hunch and a handful of coincidences, its demise was inescapable.

This is unfortunate because it would benefit investors more if financial panics, crashes, and disasters all occurred in the same month.

How Real Is the October Effect?

It appears from the data that it is not. Many of these events occurred quite some time ago, such as the 1987 Black Monday crash, but some people still seem to believe in it. Some investors may be wary of an October downturn due to a psychological bias toward making such a prediction, even though the data does not support such a scenario.

Contrary to popular belief, October is typically a positive month for stock markets, with an average gain of 0.6% since 1928.

Which Month Has Seen the Lowest Stock Prices?

Depending on the time frame you use, September may or may not be the worst month for stocks, but historically speaking, it has been the worst month, with an average loss of about 1%.

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Conclusion

The October effect refers to the widespread conviction that stock prices tend to decline in October. Large market crashes, such as Black Monday in 1987, have been said to occur this month, lending credence to the theory of a market anomaly in October. However, there is little hard evidence for the October effect, and historical data shows that October is actually the best month of the year.

And October 2022 was one of the best months for the stock market in recent memory. True market anomalies are rare because markets are typically efficient, so most of the time they simply don’t exist (especially once anomalies are identified and publicly known). Therefore, the concept of the October effect shouldn’t be used to make trading decisions.

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