October can be one of the most feared months of the financial calendar, thanks to a theory called the “October Effect” that stocks tend to decline this month.
Some of the largest historical market crashes have happened in October, only adding to worries about the October Effect. Black Monday, Tuesday and Thursday all happened in October 1929, quickly followed by the Great Depression.
On Oct. 19, 1987, the great crash of 1987 occurred, when the Dow fell 22.6 percent in one day. The Panic of 1907 happened in October 1907 when threats of legislative action against trusts and shrinking credit caused a financial panic on Wall Street. Bank runs and heavy panic selling at the stock exchange resulted.
October Effect psychological
The October Effect, however, is more of a psychological effect because of the market panics that have occurred in Octobers. If you look at the facts, October doesn’t necessarily spell doom for the stock market. The month of October isn’t any worse for the stock market than any other month of the year.
Most investors have lived through more bad Septembers than Octobers, and financial events don’t cluster at one point.
For example, the Lehman Brothers’ collapse during the 2008-09 financial disaster happened in the spring. The 2008 September drop in the U.S. stock market from the subprime mortgage meltdown went global, causing $2 trillion in losses from the world economy in a day.
After the Sept. 11 World Trade Center attacks in 2001, the Dow’s single-day point decline was bigger than Black Monday in 1987.
More stocks fall in November and December when investors rebalance their portfolios at the end of the year. Many financial troubles in the stock market the rest of the year aren’t given Black Day status, which may just be a name the media gives to an event in October, adding to the legacy of the October Effect.
The original “Black Day” was Black Friday in September 1869 when speculators tried to corner the gold market with an insider at the Treasury. Amid rising prices, the Treasury broke the speculators by selling $5 million in gold and dropping the price by $25 in a day. Black Friday is now more of a key shopping day after Thanksgiving.
A buying opportunity?
With all of that bad news in September, October could be one of the better stock buying opportunities of the year. Market slides in 1987, 1990, 2001 and 2002 turned around in October and held long-term rallies.
The second week of October is the start of the fourth-quarter earnings season, when publicly traded firms announce how they’re doing for the year.
Paying attention to what companies have to say during fourth-quarter announcements may be much more worthwhile to investors than worrying about the October Effect and how it could affect them. Chances are there will be other months when things are a lot worse.