October Effect: Definition, Examples, and Statistical Evidence

What Is the October Effect?

The October effect refers to the belief that stocks tend to decline during the month of October. It is considered to be more of a psychological expectation than an actual phenomenon, as most statistics contradict the theory.

Some investors may be nervous during October because some large, historical market crashes occurred during this month.

Along with the September effect (which also predicts weaker markets during October), actual evidence for the existence of the perceived market anomaly October effect is not very solid.

Indeed, October’s 100-year stock market history has, in fact, been net positive. That's in spite of being the month of the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987, when the Dow plummeted 22.6% in a single day, (and remains arguably the worst single-day decline in market history on a percentage basis).

Understanding the October Effect

Proponents of the October effect, one of the most popular of the so-called calendar effects, argue that October is when some of the greatest crashes in stock market history occurred. These include 1929's Black Tuesday and Black Thursday and the 1987 stock market crash.

While statistical evidence doesn’t support the phenomenon that stocks trade lower in October, the psychological expectations for the October effect still exist.

The October effect, however, tends to be overrated. Despite the moniker, this seeming concentration of dark market days is not statistically significant.

In fact, September historically is more often down than October. And from a historical perspective, October has marked the end of more bear markets than the beginning.

This makes October an interesting prospect for contrarian buying. Investors who tend to see a month negatively can create opportunities for others to buy during that month. However, the end of the October effect, if it ever was a market force, may be at hand, as the month's stock market results have tended to be net positive, on average, over the past century or more.

October Crashes

What is true about October is that it traditionally has been the most volatile month for stocks. According to research from LPL Financial, there are more 1% or larger swings in October in the S&P 500 than in any other month in history, dating back to 1950.

Some of that can be attributed to the fact that October precedes elections in early November in the U.S. every other year.

September, not October, has more historical down markets. However, October also has had its fair share of record stock market crashes. Some of the events over the decades that have given October the reputation for stock losses include:

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

Interestingly, the catalysts that set off both the 1929 crash and the 1907 panic happened in September or earlier, and the market reaction to them was simply delayed.

In 1907, the panic nearly occurred in March. Throughout the year, the public’s confidence in trust companies persistently diminished. They were considered risky because of their lack of regulation. Eventually, public skepticism came to a head in October and sparked a run on the trusts.

The 1929 Crash arguably began in February, when the Federal Reserve banned margin-trading loans and cranked up interest rates.

The Disappearance of the October Effect

The numbers don’t support the October effect. If we look at all October monthly returns going back more than a century, there simply is no data on average to support the claim that October is a losing month.

Not surprisingly, some historical events have occurred in the month of October, but they most likely have remained in the collective memory because the name Black Monday sounds ominous. Markets have also crashed in months other than October.

Many investors today have a better memory of the dotcom crash and the 2008–2009 financial crisis, yet none of those days were given the "black" moniker to bear for their particular month.

Lehman Brothers’ collapse happened on a Monday in September and marked a major escalation in the global stakes of the financial crisis, but it didn’t get reported as a new Black Monday.

For whatever reason, the news media no longer leads with black days—and Wall Street doesn’t seem eager to revive the practice, either.

Moreover, an increasingly global pool of investors doesn’t have the same historical perspective when it comes to the calendar. The end of the October effect is perhaps inevitable as, in reality, a gut feeling mixed with a few random occurrences and a media label created the myth.

In a way, this is unfortunate, as it would be ideal for investors if financial disasters, panics, and crashes occurred in just one month of the year.

The Bottom Line

The October effect is the belief that stocks fall, on average, during the month of October. This supposed market anomaly has been cited in reflection of large market crashes that have occurred during this month, such as 1987's Black Monday.

However, actual evidence for the October effect is scant—and, in fact, October has been a net positive month, on average, going back a century. For example, October of 2022 was one of the best-performing months in recent stock market history.

As with other supposed market anomalies, the reality is that they probably don't exist, as markets do tend to be efficient (especially once anomalies are identified and publicly known). As such, one probably should not use the notion of the October effect to make trading decisions.