October Effect

October Effect

What is the effect of October?

The October effect is a perceived market anomaly that stocks tend to go down in October. The October effect is seen primarily as a psychological expectation rather than a real phenomenon since most statistics run counter to theory. Some investors may be nervous in October, as the dates for some major historical market crashes occurred during that month.

The events that gave October a reputation for inventory loss have occurred over the 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 October 19 and saw the Dow plunge 22.6% in a single day, is arguably the worst drop in a day. The rest of the dark days, of course, were part of the process that led to the Great Depression – an economic disaster that was not matched until the mortgage collapse almost wiped out all of it. the global economy.

Key points to remember

  • The October effect is a perceived market anomaly that stocks tend to go down in October.
  • The October effect is seen primarily as a psychological expectation rather than a real phenomenon since most statistics go against theory.
  • The October effect, as well as other calendar effects, seem to have largely disappeared in recent decades.

Understanding the October effect

Proponents of the October effect, one of the most well-known of the so-called calendar effects, argue that October is the time when some of the biggest stock market crashes, including the Black Tuesday and Thursday of 1929 and the stock market crash of 1987. Although the statistical evidence does not support the phenomenon of falling trade in October, the psychological expectations of the October effect still exist.

The October effect tends to be overestimated. Despite the dark headlines, this apparent concentration of days is not statistically significant. In fact, September recorded more historic months of decline than in October. Historically, October marked the end of more bear markets than it started. This puts October in an interesting perspective for purchases against the current. If investors tend to view a month negatively, it will create buying opportunities during that month. However, the end of the October effect, if it has ever been a market force, is already at hand.

Special considerations

What is true is that October has always been the most volatile month for stocks. According to a study by LPL Financial, there are more than 1% or more swings in October in the S&P 500 than any other month in history dating back to 1950. Part of this can be attributed to the fact that October precedes elections in early November in the United States every two years. Curiously, September, not October, has more historic bear markets.

More importantly, the catalysts that triggered both the crash of 1929 and the panic of 1907 occurred in September or earlier, and the response was simply delayed. In 1907, panic almost occurred in March. Throughout the year, public confidence continued to decline in trust companies, which were considered risky due to their lack of regulation.

Eventually, public skepticism peaked in October and sparked a race for trusts. The 1929 crash probably started in February when the Federal Reserve banned margin lending and raised interest rates.

The disappearance of the October effect

The figures do not support the October effect. If we look at all of the monthly returns for October going back over a century, there is simply no data to support the claim that October is a losing month, on average. Indeed, certain historical events fell during the month of October, but they mostly remained in the collective memory because Black Monday seems worrying. The markets also collapsed in the months other than October.

Many investors today have a better memory of the dotcom crash and the 2008-2009 financial crisis, but none of these days has received the nickname of black to wear for its particular month. The Lehman Brothers collapse occurred on a Monday in September and marked a sharp increase in the global stakes of the financial crisis, but it was not reported as a new Black Monday. For some reason, the media no longer leads with the dark days and Wall Street also does not seem eager to revive the practice.

In addition, an increasingly global investor base does not have the same historical perspective with regard to timing. The end of the October effect was inevitable, as it was mostly an instinct mixed with a few random chances of creating a myth. In a way, this is unfortunate, because it would be wonderful for investors if financial catastrophes, panics and accidents chose to occur only for one month of the year.

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