October Effect

September 24, 2021

If you’ve lived through the Black Monday market crash of 1987, or the Financial Crisis of 2008, you probably still get a little nervous when the month of October rolls around. Many investors and financial pundits alike refer to the increased trepidation investors feel in October as the October Effect. The October Effect is the psychological anticipation of a stock market crash in October over any other month. October has been credited with some of the biggest market crashes in history,  such as the Great Depression of 1929, the Black Monday market crash of 1987, and the Financial Crisis of 2008.  Often, the October Effect causes even though most experienced investors to abandon their long-term, buy-and-hold strategy and sell investments even though the market drops a relatively modest amount.

Is there any merit to the October Effect? Historically speaking, the answer is unequivocally, no. Statistically speaking, an argument could be made that more “Black Days” have occurred in the month of September than in October.  However, October still gets blamed for market calamities, even when the catalyst for the event occurs months, or even years earlier. For instance, many people believe the catalyst for the stock market crash of 1929 occurred when the Federal Reserve banned margin trading and increased interest rates in February of 1929. Similarly, one of the largest single-day market drops in Dow history occurred in September 2001 following the attacks on the World Trade Centers.

Why then, is October perceived as such a treacherous month for investors? Possibly, it’s because investors are rudely awakened from false senses of complacency as periods of low volatility in the summer turn to periods of higher volatility in the fall.  Or maybe it’s because investors sell more stock in October and November as they start looking for opportunities to “tax-loss harvest” and offset capital gains with capital losses before the end of the year.  Whatever the case, history has proven that October is no more susceptible to a market correction than any other month.

So, what can you do when the markets start looking a little SPOOKY?  Be ready to buy. To illustrate, the stock slides that occurred in October 1929, 1987, and 2001 all led to some of the longest stock market rallies in history. In fact, Black Monday has proven to be one of the best times to buy stocks in the last 50 years!

The point is, while October may get a bad rap, don’t be scared away from achieving your long-term goals.  If you’re looking to take advantage of what’s generally considered a seasonally FRIGHTENING market, work with your financial advisor this fall and add to, or upgrade some of your positions.

Have a safe and happy Fall Season!

Chaz Price, CFP®