The “October Effect” is a perceived market anomaly that stocks tend to decline during the month of October. It is mainly a psychological expectation rather than an actual phenomenon as most statistics don’t support the theory. There have been some events in October that have given October a reputation for being a month of declining stock prices. The Panic of 1907; Black Tuesday of 1929; Black Thursday of 1929; Black Monday of 1929 and Black Monday of 1987. The only one I remember is 1987 when the market went down a bit over 22% in one day, October 19, 1987.
In reality, September has had more “down” months than October. The historical average return for the stock market has been positive in October despite the big drops in 1929 and 1987.1
So why the increased volatility in October? Perception has a lot to do with short term investor reactions. With the history of some really bad days in October overshadowing the fact that average returns for October have been historically positive, investors are more on edge in October and more likely to pull the plug on their investments at the slightest hint of bad news. Another potential reason is that every other October is the month before an election that can change the make-up of Congress and the White House. More angst for investors. Finally, I think another reason for such investor anxiety in October is how the bad days were painted. I mean let’s face it, “Black Monday” just sounds ominous. Wouldn’t you be on edge during a month that’s had 2 Black Mondays, a Black Tuesday and a Black Thursday? Is no day of the week safe in October?
I think the October Effect is overdone. Truth be known, bad days have occurred in other months than October. The 2008-2009 mortgage crisis started with the Lehman Brothers meltdown in September. The “sell in May and then go away” theory has led to some volatile Mays. The October Effect is more myth than fact. It would be wonderful if we all knew that all the bad days would occur in a particular month, but it just simply isn’t the case.
How will October 2019 be? Stay tuned!
1https://www.investopedia.com/day-trading/best-time-day-week-month-trade-stocks/
These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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