October brings on images of pumpkins, Halloween costumes, and changing leaves – but in the financial world, October is one of the most feared months on the calendar. Why? The October Effect.
The October Effect is a theory that stocks typically decline during the month of October. Luckily, this seems to be more a psychological expectation, as there are many statistics that actually disprove this theory.
Let’s take a look at the facts:
The October Effect: Market Downfalls
- The Panic of 1907 (October 1907)
Wall Street was entrenched in financial panic, as there were many threats of legislative action against trusts. There was a period of heavy, panic-induced selling at the stock exchange.
- Black Tuesday, Thursday and Monday (October 1929)
The Crash of 1929 was record-breaking – in all the worst ways. The Dow Jones did not return to its 1929 high until 25 years later.
- Black Monday (October 1987)
On a Monday in 1987, automatic stop-loss orders throttled the market, causing a domino effect across the globe.
Is October a financial death sentence? Nope.
October: A Month for Positive Turnaround
In actuality, October has proven to be the beginning of market turnarounds.
Market slides in 1987, 1990, 2001, and 2002 all turned around during October, recovering to, and sometimes surpassing, previous valuations.
Bottom Line: Don’t fear October.