• History shows that many market crashes and ‘black swan’ events have occurred in the month of October.
  • But despite its notoriety, data from 1970 shows that October is actually not a ‘bad’ month for shares.

What is the October Effect?

  • The ‘October Effect’ is a belief that sharemarkets are more likely to post declines in October, than any other month.
  • Certainly some of the markets’ most significant crashes have occurred during this month, namely the 1907 Bankers’ Panic, the Wall Street Crash of 1929, and the ‘Black Monday’ crash in 1987.
  • For instance, looking back to 1970, the US S&P 500 index fell by a massive 21.8 per cent in October 1987, far greater than the 12.5 per cent decline posted in March 2020 (onset of Covid-19).
  • But while big market declines have occurred in October, the analysis of data since 1970 (52 Octobers) shows that the S&P 500 has declined in October only 42 per cent of the time. In fact, not only has the S&P 500 declined less frequently than it rose in October, it has also fallen less on average than other months.
  • Further, when split by decade, the period from 1970-1979 was the only decade where the average monthly S&P 500 performance in October was negative. In fact, the average gain of the S&P 500 in October has actually been rising in trends terms, peaking at an average 2.3 per cent rally in the decade following the GFC.
  • Interestingly, when the average performance for the S&P 500 across each month of the year is compared, October ranks sixth. September has clearly been the worst for shares over that time period. It has been the only month since 1970 that has fallen on average. Since 1970, April (1.6 per cent) has posted the strongest average monthly gain, closely followed by December (1.55 per cent) and November (1.51 per cent).
  • Recently, decade-high inflation rates and a significant increase in US interest rates have been large contributors to sharemarket volatility and dampened investor sentiment. The S&P 500 index slumped by 9.3 per cent in September and is down 24.8 per cent year-to-date.

Originally published by Divik Nigam, Associate Equity Market Analyst, CommSec