Is October a Good Month for Stocks?

October often carries a mixed reputation among investors, with popular perceptions suggesting it is a time of increased risk and market downturns. These beliefs, rooted in historical occurrences, contribute to apprehension. Examining historical data and market phenomena can clarify these perceptions and provide a more informed perspective on October’s role in the financial calendar.

Historical Performance Trends in October

October has shown a tendency for positive returns, though its performance varies compared to other months. The S&P 500 index indicates an average gain of 0.52% in October since 1928, and 1.4% since 1945. The S&P 500 has recorded a positive return in October almost 60% of the time since 1950, which is close to the long-term average across all twelve months.

Despite these positive averages, October’s historical performance among gain-averaging months is often the lowest. September generally holds the distinction of being the worst-performing month for stocks, with an average S&P 500 return of approximately -0.5% since 1950. While October tends to be better than September, it is also notable for higher volatility. October has been about 35% to 36% more volatile than the average for the other eleven months of the year, experiencing more 1% or larger daily price swings in the S&P 500 than any other month since 1950.

The “October Effect”

The “October Effect” refers to a widespread belief that stock prices are prone to decline during this month, often experiencing significant volatility. This perception is psychological, stemming from prominent market crashes and panics in October throughout history. The belief suggests a seasonal pattern of market weakness.

The theory gains traction from the fact that a notable portion of historical single-day percentage declines in the Dow Jones Industrial Average have occurred in October. However, statistical evidence often contradicts this notion, suggesting the “October Effect” is more superstition than a consistent phenomenon. Despite the psychological anticipation of downturns, October has, on average, been a net positive month for the stock market over the long term.

Major Market Events Associated with October

October has been associated with significant events in stock market history, contributing to its volatile reputation. The Panic of 1907, for example, saw widespread financial instability and bank runs, underscoring structural weaknesses that contributed to the Federal Reserve’s establishment.

The Wall Street Crash of 1929 also commenced in October, with major declines like the nearly 12% plummet of the Dow Jones Industrial Average on October 29, “Black Tuesday,” which followed a period of speculative excess, marking the onset of the Great Depression. Decades later, October 19, 1987, witnessed “Black Monday,” when the DJIA experienced its largest single-day percentage drop in history, falling 22.6%, prompting regulatory changes like circuit breakers. More recently, October 2008 saw significant declines during the global financial crisis, with the S&P 500 falling nearly 17% that month. Despite these downturns, October has also frequently marked the end of bear markets, serving as a turning point for subsequent long-term rallies.