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October Effect | Stock Market Upcoming Crash?

October Effect

The October impact is a market oddity in which equities tend to fall even during the month of October. Because most facts contradict the notion, the October impact is thought to be more psychological anticipation than an actual event. Some investors may be concerned during October since some of the most significant historical markets collapses occurred during a particular month.

The incidents that have earned October the record for stock falls have occurred over a long period of time, but they include:

  • The Panic of 1907
  • Black Tuesday (1929)
  • Black Thursday (1929)
  • Black Monday (1929)
  • Black Monday (1987)

The great collapse of 1987, which happened on October 19, and saw the Dow drop 22.6% in a single day, is possibly the most significant single-day decrease. 1 The other dark days became a component of the process that resulted in the Great Depression—and unequalled economic calamity until the mortgage crisis nearly wiped out the entire global economy.

Recognizing the October Effect

Founders of the October effect, among the most prominent of the so-called calendar impacts, contend that October is when several of the worst stock market disasters in history happened, including the 1929 Black Tuesday as well as Black Thursday crashes as well as the 1987 stock market crash. While statistical data does not support the phenomena of stock market declines in October, psychological assumptions of the October impact persist.

The October impact, on the other hand, is often overstated. Despite the ominous names, this apparent concentration of days is statistically insignificant. In fact, September has historically had more low months than October. In the past, October has seen the end of further bear markets than the starting of others. This puts October in a unique position for contrarian purchasing. If investors have a pessimistic outlook on a month, it will generate chances to purchase throughout that month. However, the ending of the October effect, if it was ever a market force, has arrived.

How Does the October Effect Work?

The October effect is caused by occurrences (including Black Tuesday and Black Thursday in 1929 and Black Monday in 1987) that caused the stock market to drop horribly. There is no verified data or hypothesis to support the idea that stocks fall in October. Because of the large crashes that occurred this month, it is merely a presumption or even a psychological phenomenon.

However, the October effect is overstated. Even though this month is connected with dodgy stock market names, concentrating just on this month is deemed statistically irrelevant. In comparison to other calendar months, September has seen larger stock declines than October.

Based on past statistics, the month of October saw a marked finish to many bear markets in comparison to the beginning phase. As a result, October is an important month for contrarian purchasing. Investors who have a bad feeling about a certain month are more likely to buy more in that month. It is correct to claim that the month of October is the most volatile or inconsistent month for equities.

According to LPL Financial analysis, the S&P 500 has seen more market fluctuations (at least 1%) in October than in any other month since 1950. Many assume it is because of the US elections, which will take place later in November. Instead of October, September is the month with the most stock market collapses. The elements that caused the 1907 and 1929 crashes increased in September or maybe earlier, although the effect was obvious later in October.

When it comes to the year 1907, tensions were already prevalent in March. The other significant fall of 1929 occurred in February when the Fed restricted margin-trading borrowings and raised interest rates. From 1990 through 2014, the average return on the Dow Jones Industrial Average for the month of October was 0.2%.

Specific Considerations

True, October has historically been the most turbulent month for markets. According to LPL Financial analysis, the S&P 500 had more than 1% or bigger movements in October than any other month since 1950. Some of this might be ascribed to the fact that in the United States, elections are held in early November every other year. Surprisingly, September had more historical down markets than October.

More critically, the triggers for both the 1929 crash and the 1907 panic occurred in September or earlier, and the response was merely delayed. The panic nearly happened in March of 1907. Throughout the year, the public’s trust in trust corporations, which were deemed unsafe due to their lack of regulation, continued to erode. Eventually, public distrust boiled over in October, sparking a run on the trusts.

The 1929 Crash is said to have started in February when the Federal Reserve outlawed margin-trading loans and raised interest rates.

The disappearance of the October Effect

If you take a look at all of the October monthly returns dating back more than a century, there is just no evidence to support the notion that October is a losing month. Despite the fact that this month has seen a number of historical occurrences, they have primarily stayed in the public consciousness because of Black Monday’s somber tone. In addition to October, other months have also had market collapses.

Even while many investors today have a sharper recall of the dot-com crash and the 2008-2009 financial crisis, none of those days was given the dreaded “black label” to bear for their respective months. The failure of Lehman Brothers happened on a Monday in September, signalling a dramatic increase in the global stakes of the financial crisis. It was not, however, referred to as the second Black Monday. The mainstream media no longer promotes black days, and Wall Street appears uninterested in recreating the trend.

Moreover, an increased international group of investors doesn’t really share the same historical chronological viewpoint. Because it was mostly a gut sensation combined with just a few random possibilities to form a story, the end of October impact was inescapable. This is unfortunate in some ways since financial disasters, panics, and crashes would be great for investors if they only occurred once a year.

Whereas the October Effect is a scary concept, you shouldn’t be too concerned about it. Despite the fact that two true historical instances may have contributed to the dread of losses in October, statistically, you are more likely to earn profits than losses in this month.

Why is October such a horrible month?

The events that have given October the record for stock market losses occurred over a long period of time, but they include:

  • The 1907 Great Depression
  • Tuesday the 13th (1929)
  • Thursday the 13th (1929)
  • Monday the 13th (1929)
  • Monday the 13th (1987)

The great crash of 1987, which occurred on October 19 and saw the Dow drop 22.6% in one day, is usually regarded as the largest single-day drop in history. The other dark days were part of the process that resulted in the Great Depression and unprecedented economic calamity until the mortgage collapse virtually wiped out the entire global economy.

Is October a good month for stocks?

The October effect, one of the most notable so-called calendar effects, asserts that October is a month when some of the biggest stock market disasters in history occurred. While there is no scientific evidence that shares trade lower in October, psychological expectations remain unchanged. This impact, however, is occasionally overstated. Despite the menacing names, this seeming cluster of days is statistically negligible. In fact, September has historically experienced more bad months than October.

The month of October saw the ending of more bear markets than the start of them. This places October in an exceptional position for alternative investing. If investors have a negative perspective for a certain month, there will be possibilities to purchase during that month.


Finally, this conclusion teaches inexperienced investors an important lesson: even specialists make mistakes. The October Effect is not the only financial legend. It has, however, resulted in investors withdrawing cash from the market all through the month, experiencing losses in the form of missed gains if they had simply remained invested. Another essential point to remember is that following the herd is never a good idea. Those who do their study fare well in the realm of investing. So, the next time someone tells you that October is a horrible month to invest, or that June is the best month to invest, or anything else concerning investing your money, conduct your research first.


Reminder from Behindyourgoals

The information should not be interpreted as a recommendation, an offer to buy or sell, or the solicitation of an offer to buy or sell any security, financial product, or instrument, or to engage in any trading strategy. Readers should seek their own counsel.

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By Anchal

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