Who’s Afraid of… ‘The October Effect’?


There are a lot of reasons October is traditionally one of the scariest months—college midterms, Halloween and, of course, pumpkin-spice everything. (Pumpkin-spice kale chips? Yuck.) But did you know that, thanks to what's been dubbed "The October Effect," it can be a scary month for investors, too?

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?

Turns out, there isn't. As this market analysis shows, there have been 52 years since 1928 where the stock market actually increased in value in October, compared to 37 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 percent.

Mostly, it looks like October just got a bad rap by association.

So does this mean the market won't drop this month?

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 several factors that can influence the market—one way or the other—for the rest of the month.

So far in October 2018, we've experienced some volatility thanks to rising interest rates and an increasing 10-year Treasury yield. (When bond returns increase, some people funnel more money into this lower-risk investment—so money flows out of stocks and into bonds.)

Plus, many companies report third-quarter earnings in October, which can cause some more choppiness: If earnings are down, or far off from analyst projections, stock prices can dip. If they're higher than expected, the stock price can jump.

The market often reacts to political developments, too. So we may also see increased volatility as we near midterm elections in early November.

So what should I do?

Avoid making sudden, emotion-based changes to your investing strategy, and continue on as you would at any other point in the year. History's shown us that trying to time the market is a losing game. "People get lucky sometimes, but no one has been able to consistently beat the market through active management," says Certified Financial Planner Eric Roberge.

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. "Just know your time horizon and make decisions accordingly," Roberge says.

This story was updated in October 2018.