In-depth Analysis

What is the October effect?


The October Effect is an interesting illustration of the very real consequences of market psychology. It’s sometimes also referred to as the ‘Mark Twain effect’ after his famous and very sarcastic quote in the book Pudd’nhead Wilson:

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

Depending on whom you ask, the October effect suggests that this is a month that the stock market will fall or, more likely, the month that will bring greater volatility than most others. 

The fact is, there isn’t much at all behind the concept of the October Effect. 

In the past, there have been a few major events that have contributed to the theory, and we’ll explore them more below. What causes the assumption to persist, though, is really no more than a bad reputation and a little confirmation bias.

Actually, September has a greater number of historically negative months for the market than October does. It’s also been dubbed the September Effect, and for more obvious reasons. According to JP Morgan, between 1950 and 2020, the popular American index, the Dow Jones, has declined by 0.7%, while the S&P 500 has, on average, declined by 0.5%. Even if it was founded later, in the early 1970s, the Nasdaq has also been down on average in the month of September (by 0.6%).

October on average for the last 50 years has shown an average positive result for the S&P 500 of around 0.9%. It’s also been argued that the main drivers for the events described below were established in September, and even earlier. 

Regrettably, fear sells, and as a result, each year, more articles and news items pop up to provide new ideas for why October may be a disastrous month for the stock market, always using previous collapses as proof of the theory. In actuality, this kind of news is really preying on the inexperienced trader and prompts them to act out of emotion rather than logic.

Historical dark days that happened in October

The Panic of 1907

The financial crisis known as the Panic of 1907 was precipitated by a string of poor judgments made by banking institutions and a frenzy of withdrawals brought on by public mistrust of the banking system. JP Morgan and other affluent Wall Street bankers provided loans from their own fortune in order to avert a catastrophic financial disaster in the nation.

Black Thursday 1929

The phrase “Black Thursday” refers to another notorious day in the stock market history on Thursday, October 24, 1929, when the market opened 11% lower than the previous day’s close. The frenzied selling persisted throughout the day of intense trade. Black Thursday is regarded as the start of the 1929 Great Stock Market Crash, which lasted until October 29.

Black Thursday also refers to Thanksgiving Day shopping and bargains, which serve as a preview of Black Friday, the start of the Christmas shopping season.

Black Monday 1929

Nearly 13% of the Dow Jones Industrial Average was lost on “Black Monday,” October 28, 1929. Opinions among Federal Reserve officials varied on the best way to stabilize the economy and the financial markets.

The Dow lost almost half its value by mid-November. Stocks continued to fall into the summer of 1932, when the Dow finished at 41.22, its lowest value of the 20th century and 89% below its all-time high. It wasn’t until November 1954 that the Dow reached its pre-crash levels.

Source: Federal Reserve History

Black Tuesday 1929

Black Tuesday refers to the stock market catastrophe that occurred on October 29, 1929, in the United States. This set off a series of occurrences that resulted in the Great Depression, a global economic downturn that lasted for ten years and impacted all industrialized nations.

The stock market faltered in the late 1920s as real estate prices dropped. People hurried to sell their shares and exit the market on October 29 as stock prices began to decline, which further lowered prices. This cycle resulted in an increase in “panic selling,” which caused the stock market to decline to all-time lows.

Black Monday 1987

American markets dropped more than 20% in a single day on October 19, 1987, during the “Black Monday” stock market meltdown. Investor panic and computer-driven trading algorithms that followed a portfolio insurance strategy are believed to have been the primary causes of the disaster.

Since then, the SEC has installed many safeguards, including trading limits and circuit breakers, to stop investors from selling in a panic and repeating the events that happened that day.

Final Word

It doesn’t really matter what the driving force behind October’s reputation is, timing the market is mostly recognized as a complex skill to master. It is helpful to be aware of market patterns such as these when trading and investing, so then you can take advantage of lower prices, or short-sell the markets with financial derivatives like CFD, or “Contract For Difference”. 

It is not preferable to sell in a panic if you’re investing over the long run, since doing so would lock in losses. Always keep in mind your financial goals and your strategy. After a downward movement, it’s likely for the market to eventually rebound, and historically speaking, bull markets have lasted for a far longer period of time than bear markets.

Investors can use the periods of market downturns to their advantage by purchasing financial assets they’re interested in at lower prices. Downturns are a fact of trading life. Smart investors know to buy when others are selling and have a list of companies or other assets they want to purchase ready to go at a discount.

Return your attention to your trading and risk management strategies, consider your long-term investing plan, and as always, you should never put more money at risk in the markets than you can afford to lose.





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