What Is the October Effect?
Let me explain the October effect to you directly: it's the idea that stocks tend to drop during October. I see it more as a psychological belief than something backed by facts, since most data doesn't support it.
You might feel uneasy about investing in October because of major historical crashes that happened then.
Understanding the October Effect
Along with the September effect, which also suggests weaker markets around that time, the evidence for the October effect as a real market anomaly isn't strong. In fact, looking at over 100 years of stock market history, October has been net positive overall. That's despite events like the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987, when the Dow fell 22.6% in one day—still one of the worst single-day drops on a percentage basis.
If you believe in the October effect, one of those popular calendar effects, you might point to those major crashes in stock market history. But statistically, stocks don't trade lower in October, so the expectation is mostly in your head.
This effect gets overstated. The clustering of bad market days in October isn't statistically meaningful. Historically, September sees more down markets than October, and October has often marked the end of bear markets rather than the start.
That creates opportunities for contrarian buyers like you. If others view the month negatively, it might be a good time to buy. But if the October effect was ever real, it's fading—over the past century, the month has been net positive on average.
October Crashes
What I can tell you is true: October has historically been the most volatile month for stocks. Research from LPL Financial shows more 1% or larger swings in the S&P 500 in October than any other month since 1950.
Part of that volatility comes from October leading into U.S. elections in early November every other year. September has more historical down markets, but October has seen its share of big crashes.
Notable October Events
- The Panic of 1907
- Black Tuesday (1929)
- Black Thursday (1929)
- Black Monday (1929)
- Black Monday (1987)
More on October Crashes
Interestingly, the triggers for the 1929 crash and 1907 panic started in September or earlier, with the market reaction just delayed. In 1907, the panic almost hit in March, as public trust in unregulated companies eroded throughout the year, culminating in a run on trusts in October. The 1929 crash arguably began in February when the Federal Reserve banned margin loans and raised rates.
Fast Fact
Contrary to the October effect, October 2022 was one of the strongest months in U.S. stock history, with the Dow up about 12% and the S&P 500 up nearly 6%.
The Disappearance of the October Effect
The numbers don't back the October effect. If you examine October returns over more than a century, there's no average data showing it's a losing month. Sure, some big events happened in October, but they've stuck in memory partly because names like Black Monday sound dramatic. Markets have crashed in other months too.
You might remember the dotcom crash or the 2008-2009 crisis better today, but those didn't get 'black' labels for their months. Lehman Brothers collapsed on a Monday in September, escalating the financial crisis, but it wasn't called a new Black Monday.
Media doesn't hype 'black' days anymore, and Wall Street isn't pushing it. With a more global investor base, historical U.S. perspectives matter less. The October effect was likely just a myth from gut feelings, random events, and media hype. It's a shame in a way—imagine if all financial disasters happened in one month.
Is the October Effect Real?
Data says no. But some people believe it because of significant past events like the 1987 crash. This creates a psychological bias where you might fear a downturn in October.
Are Stocks Usually Down in October?
No. Since 1928, stocks have averaged a rise of more than 0.6% in October.
Which Has Been the Worst Month for Stocks Historically?
It varies by time period, but over the past century, September has been the worst, losing about 1% on average.
The Bottom Line
The October effect is the notion that stocks drop on average in October, linked to crashes like 1987's Black Monday. But evidence is weak—October has been net positive over a century, and 2022 was exceptionally strong. Like other market anomalies, it probably doesn't exist because markets are efficient, especially once patterns are known. Don't base your trading on it.
Key Takeaways
- The October effect is the perception that stock markets decline during October, classified as a market anomaly.
- It's one of several calendar anomalies, including the September effect and Santa Claus rally.
- It's more psychological than real, as statistics counter it.
- The October effect and similar anomalies have largely disappeared over recent decades.
- October has been a net positive month on average over the past century or more.
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