What is the October stock market?

October is just another month in the year, but in the stock markets, October stands to be the most feared by stock market players. Events over more than a hundred years give October its unique place in the world of finance, one that continues to impact investor sentiments year after year.

What is the October stock market?

The October stock market refers to the October effect. It is the impact on investor sentiments, conditioned over years due to multiple events that have affected financial markets, have on stock markets. The October Stock market is a recognized market anomaly, which gathers that stock values tend to decline during this month in the financial calendar. Although as per many statisticians, the idea of the October stock market is considered more of a presumed expectation rather than an actual phenomenon.

There have been multiple events over decades that give October its unique reputation for market and stock losses. These include the 1907 year of Panic, Black Tuesday of 1929, Black Thursday of 1929, Black Monday of 1929, and 1987.

October 19, 1987, infamously referred to as the Black Monday of 1987, has been considered one of the worst single-day downfalls in the history of stock markets. It saw the Dow plummet 22.6% in a single day, causing immense panic and leaving a black mark on investors and their regard for October. The other black days mentioned previously were all unfateful events during the Great Depression - an economic disaster that continued to stand unrivalled till the 2007-08 Subprime mortgage meltdown, which nearly wiped the global economy.

Understanding the October Stock Market

Right from 1907, also referred to as the Bank Panic of 1907, Wall street was engulfed with a streak of financial panic, arising from threats of legislative action against trusts and shrinking credit. The panic settled in through the entire of October up until November 1907. The financial panic amongst investors gave rise to heavy panic selling at the stock exchanges and multiple bank runs. A J.P Morgan-led consortium acted as the Federal Reserve, much before its existence saving the US from what could have been a serious crash in the financial markets.

Market research and statistical studies also show that October has more commonly stood to take the burn for financial disruptions taking place in September. Both crashes of 1929 and 1907 that are known to have induced panic amongst investors in October had their catalytic events in September or in a few months earlier. In both scenarios, domino effects led to the ultimate crash of markets in October.

Similarly, the repercussions of the attacks on the World Trade Center in September 2001 and those of the subprime mortgage crisis of September 2008, led to a higher single point decline in the Dow, than that of Monday 1987. The downfall in 2008, had the U.S economy plunging, wiping out $1.2 trillion worth of investments from the global economy in a single day.

Also the October Stock Market

Over the last few years, October has also historically ushered in the end of more bear markets than their onset. The notion that October reflects poorly on the performance of stock markets and has often seen a fall, makes it a good buying season for contrarians. All slips from 1987, 1990, 2001, and 2002 showed a start to the beginning of long-term rallies. Studies show, October 19, 1987, to have been one of the best buying opportunities of the last 50 years.

Notable and successful investor Peter Lynch is known to have bought stock from companies with dependable valuations at those fallen rates. As the market recovered, many of the company's stocks rose to their previous valuations, with a handful of stocks crossing previous benchmarks.

The Unjustified October Effect

A bad reputation in the financial calendar, largely because of the high number of black days that fall in October, is concluded to have a greater psychological effect on investors. Statistical evidence shows no concrete proof supporting the premise that stocks trade poorly in October, other than the impact of investor psychology, because of which the idea of the October stock market aka the October effect continues to dominate shareholder sentiments.

Events from the 2008-2009 financial meltdown due to the collapse of Lehman Brothers happened before October, sustaining enough evidence to showcase that majority of investors have witnessed downfalls of the stock market through varying months of the year than in October, justifying that financial events do not simply cluster together at just any give point during the year.

November and December do see the market corrections for year-end rebalancing and tax optimization through tax-loss harvesting, charitable donations, etc. Black days do often only get painted by the media. Many separate financially impactful events have rarely been described as black events solely due to the sway of the media’s delivery about them.

Even though a lot of benefits can be derived from restricting financial meltdown and investor panic to simply one month in the year, October should no more be reputed for the investor sentimental anxiety about stock markets than the remaining months of the year.