There are a lot of reasons October is traditionally one of the scariest months—college midterms, the final days of the election cycle and, of course, Halloween. But did you know that, thanks to what’s been dubbed “The October Effect,” it can be a scary month for investors, too?
That’s news to me. What’s The October Effect?
The October Effect is the fear that the stock market will decline or crash in the month of October. That’s thanks to the fact that some of the worst market crashes have occurred during this month.
There was the Panic of 1907, which began in mid-October and nearly toppled the U.S. banking system; Black Thursday in October 1929, which signaled the start to the Great Depression; Black Monday in October 1987, when the Dow dropped 22.6 percent in a single trading session; and the U.S. bear market of 2007-2009, which began in October 2007 and accelerated dramatically in October 2008, leading to the Great Recession.
But is there any evidence that the market is actually more likely to dip in October?
It turns out, there isn’t. As this market analysis from 1928 to 2016 shows, there have been 52 years where the stock market actually increased in value in October, compared to 36 years of losses—and an average gain of .5 percent. In fact, the only month with more losses than gains is September, which has had 49 down years compared to 39 up. And it has an average loss of 1.1 percent.
Mostly, it looks like October just got a bad rap by association.
So does this mean the market won’t drop in October?
Though historically there have been more gains than losses in October, there’s no foolproof way of accurately predicting how the market will perform at any given time. There are a lot of factors that can influence the market—especially this fall.
For starters, many companies report third quarter earnings in October, which can cause some volatility. Add to that the upcoming presidential election in November: Presidential elections tend to increase market movements as well, as investors try to predict the outcome and future economic policy. Finally, as we’ve already seen, last month was a rocky one, thanks to uncertainty around whether the Fed was going to raise interest rates. And there’s ongoing speculation that the Fed will raise rates at its December meeting.
With all of these unknowns, the market could swing either way.
Is there anything I can do?
Avoid making sudden, emotion-based changes to your investing strategy, and continue on as you would at any other point in the year.
“Although many people try to time the market, history shows us that it is a losing game,” says Eric Roberge, Certified Financial Planner and owner of Beyond Your Hammock. “People get lucky sometimes, but no one has been able to consistently beat the market through active management.”
It’s also important to remember that investing is a long game, and while there have been ups and downs, historically, the market has always recovered—and then some. “Take a look at historical charts of the Dow Jones, S&P 500 or any other major market index, and you will see that the [overall] trend is up,” Roberge says.
And on the even brighter side: If the market does go down, long-term investors may want to use it as an opportunity to buy more. Then you’ll stand to profit from a market rebound.
“For the short-term investor, these market drops aren’t as much of an opportunity, as the market may very well drop even more in the weeks and months to come,” says Roberge. But for the long-term investor, “opportunities do arise, and we must capitalize on them when they do. Know your time horizon and make decisions accordingly.”
October 6, 2016