You may have heard of October Effect. People perceive it as a market anomaly that stocks are likely to decline during October. Many traders, especially the new ones, usually prepare themselves to buy a lot of shares of stocks during this month.
However, experts consider the October effect mainly to be a psychological expectation rather than an actual phenomenon. Yet, many traders still get nervous during October. Their nervousness appears as many historical market crashes happened this month.
Understanding the effect
The October effect appeared after several major market crashes happened in October, including the Panic of 1907, Black Tuesday (1929), Black Thursday (1929), Black Monday (1929) and Black Monday (1987).
From those events, Black Monday is arguably the worst. It was a great crash of 1987 that occurred on October 19 and saw the Dow plummet 22.6% in a single day.
The other black days, of course, were part of the process that leads to the Great Depression – an economic disaster that stood unrivaled until the mortgage meltdown nearly took out the whole global economy with it.
The truth about the October effect
The October effect is actually overrated. Even with the dark titles, it is not been statistically significant since most of the crashes had started months before October.
The catalyst that set off both the 1929 crash and the 1907 panic happened in September or earlier and the reaction was simply delayed.
Also read: FOMC Meeting and How it Affects the Market
While in 1907, the panic nearly occurred in March, instead of October. Starting from March the tension building over the fate of trusts could have happened in almost any month.
The last, 1929 Crash arguably began when the Fed banned margin-trading loans in February and cranked up interest rates.
Therefore, traders should no longer believe in the October effect. They no longer need to possess the unnecessary fear of markets to decline just because it is October.
