October Effect: Definition, Examples, Statistical Evidence

What Is the October Effect?

The October effect is a perceived market anomaly that stocks tend to decline during the month of October. The October effect is considered to be more of a psychological expectation than an actual phenomenon, as most statistics go against the theory. Some investors may be nervous during October because some large historical market crashes occurred during this month.

Along with the September effect (which also predicts weaker markets during October), actual evidence for the existence of the October effect is not very solid. Indeed, October’s 100-year history has, in fact, been net positive despite being the month of the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987, when the Dow plummeted 22.6% in a single day, (and remains arguably the worst single-day decline in market history on a percentage basis).

Key Takeaways

  • The October effect is the perception that stock markets decline during the month of October, and it is classified as a market anomaly.
  • It is one of several calendar anomalies, along with the supposed September effect and Santa Claus rally.
  • The October effect is considered to be more of a psychological expectation than an actual phenomenon, as most statistics go against the theory.
  • The October effect, as well as other calendar anomalies, largely have seemed to disappear over the past decades.
  • In fact, October has tended to be a net positive month, on average, over the past century or more.

Understanding the October Effect

Proponents of the October effect, one of the most popular of the so-called calendar effects, argue that October is when some of the greatest crashes in stock market history, including the 1929 Black Tuesday and Black Thursday and the 1987 stock market crash, occurred. While statistical evidence doesn’t support the phenomenon that stocks trade lower in October, the psychological expectations for the October effect still exist.

The October effect, however, tends to be overrated. Despite the dark titles, this seeming concentration of days is not statistically significant. In fact, September has more down months historically than does October. From a historical perspective, October has marked the end of more bear markets than the beginning. This puts October in an interesting perspective for contrarian buying. If investors tend to see a month negatively, it will create opportunities to buy during that month. However, the end of the October effect, if it ever was a market force, is already at hand, as the month's stock market results have tended to be net positive, on average, over the past century or more.

October Crashes

What is true is that October traditionally has been the most volatile month for stocks. According to research from LPL Financial, there are more 1% or larger swings in October in the S&P 500 than any other month in history dating back to 1950. Some of that can be attributed to the fact that October precedes elections in early November in the U.S. every other year. Oddly enough, September, not October, has more historical down markets.

However, October also has had its fair share of record stock market crashes. Some of the events that have given October the reputation for stock losses have happened over decades, but they include:

  • The Panic of 1907
  • Black Tuesday (1929)
  • Black Thursday (1929)
  • Black Monday (1929)
  • Black Monday (1987)

More important, the catalysts that set off both the 1929 crash and the 1907 panic happened in September or earlier, and the reaction was simply delayed.

In 1907, the panic nearly occurred in March. Throughout the year, the public’s confidence in trust companies continued to diminish; they were considered risky because of their lack of regulation. Eventually, public skepticism came to a head in October and sparked a run on the trusts.

The 1929 Crash arguably began in February, when the Federal Reserve banned margin-trading loans and cranked up interest rates.

In contrast to October effect predictions, October 2022 was one of the most positive months in U.S. stock market history, with the Dow Jones up around 12% and the S&P 500 up close to 6%.

The Disappearance of the October Effect

The numbers don’t support the October effect. If we look at all October monthly returns going back more than a century, there simply is no data on average to support the claim that October is a losing month. Indeed, some historical events have fallen in the month of October, but they have mostly stuck around in the collective memory because Black Monday sounds ominous. Markets have also crashed in months other than October.

Many investors today have a better memory of the dotcom crash and the 2008–2009 financial crisis, yet none of those days were given the "black" moniker to bear for their particular month. Lehman Brothers’ collapse happened on a Monday in September and marked a major escalation in the global stakes of the financial crisis, but it didn’t get reported as a new Black Monday. For whatever reason, the news media no longer leads with black days—and Wall Street doesn’t seem eager to revive the practice, either.

Moreover, an increasingly global pool of investors doesn’t have the same historical perspective when it comes to the calendar. The end of the October effect was inevitable, as it was mostly a gut feeling mixed with a few random occurrences that created a myth. In a way, this is unfortunate, as it would be ideal for investors if financial disasters, panics, and crashes chose to occur only in one month of the year.

Is the October Effect Real?

The data suggests that it isn't. But some people seem to believe in it, perhaps because many of the events that happened long ago such as the 1987 Black Monday crash were significant at the time. Because there is a psychological bias toward predicting a negative outcome for this month—even though the data does not support it—there is potential for some investors to be fearful of an October downturn.

Are Stocks Usually Down in October?

No. Since 1928, stocks have, on average, risen in the month of October by more than 0.6%.

Which Has Been the Worst Month for Stocks Historically?

This will depend on the time period you look at, but over the past century, September has been the worst-performing month for stocks, losing around 1% on average.

The Bottom Line

The October effect is the belief that stocks fall, on average, during the month of October. This supposed market anomaly has been cited in reflection of large market crashes that have occurred during this month, such as 1987's Black Monday. However, actual evidence for the October effect is scant—and, in fact, October has been a net positive month, on average, going back a century.

Indeed, October of 2022 was one of the best-performing months in recent stock market history. As with other supposed market anomalies, the reality is that they probably don't exist, as markets do tend to be efficient (especially once anomalies are identified and publicly known). As such, one probably should not use the notion of the October effect to make trading decisions.

Article Sources
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  1. Federal Reserve History. “Stock Market Crash of 1987.”

  2. Library of Congress. “The Black Monday Stock Market Crash.”

  3. Stock Trader's Almanac. "September Almanac: Worst Month of the Year Since 1950."

  4. LPL Research. “Is October Really Scary?

  5. Federal Reserve History. "The Panic of 1907."

  6. Federal Reserve History. "Stock Market Crash of 1929."

  7. Forbes. "Dow On Pace For Best October Ever, Second-Best Month In 30 Years."

  8. Yardeni Research. "Stock Market Indicators: Historical Monthly & Annual Returns," Page 1.

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