What it means
The belief goes back to the stock market crash of October 1929, which came at the start of the Great Depression, and was reinforced by the sharp fall of October 1987, known as Black Monday. Further turbulence in the autumn of 2008 added to the reputation.
Because these events were dramatic, they stuck in the memory far more than the many Octobers that passed quietly. Several explanations have been offered.
Some people point to tax-loss selling, where investors sell losing shares before the year ends to reduce their tax bill. Others point to fund managers tidying their portfolios before year end, or to the fact that company results and economic reports arrive in clusters in the autumn.
When researchers test the idea against long runs of data, the pattern is weak. October has had large drops, but it has also had strong gains, and its average return is not consistently below that of other months.
What is more noticeable is that October tends to be volatile, meaning prices swing more, but swings can go up as well as down. For a business or an individual investor, the practical lesson is to avoid making decisions based on the calendar.
A company planning to sell shares, raise funds or time a share buyback should base its choice on its own finances and market conditions. Selling out of the market every September to avoid October would cost dividends and any gains in the months that follow.
The October effect is one of several calendar anomalies, alongside the January effect and the idea of selling in May and going away. Such patterns attract attention because they are easy to remember, but a pattern that is widely known tends to lose any edge it had.
Treat it as market folklore with a grain of truth about volatility, not as a forecasting tool.
In practice
Real-world examples.
Example
A retail investor reads that October is dangerous and sells all her shares at the end of September. The market rises through October and she buys back in at a higher price. She pays extra dealing fees and misses a dividend.
Example
A founder planning a $20,000,000 share sale for his software company is told by an adviser to avoid October. The finance team instead checks the company's results timetable and market conditions. The sale goes ahead in October and is fully subscribed.
Example
A pension fund manager notes that volatility often rises in the autumn and reviews the fund's cash buffer in September. She keeps the long-term allocation unchanged. The review gives her comfort that the fund could meet payments if prices swing.
Formula
Calculation
Average October return = (sum of October returns across the years studied) / (number of years)
An analyst looks at an index over five years. The October returns were +2%, -3%, +4%, -1% and +3%. Sum = 2 - 3 + 4 - 1 + 3 = 5%. Average October return = 5% / 5 = 1% per year. The figure is positive, even though one or two individual years were negative, which shows why a few bad Octobers do not prove a rule.Case study
Seen in the real world.
Greenfield Advisory is a fictional investment firm used to illustrate the October effect. In this illustrative story, a junior analyst proposed moving all client portfolios into cash each September, citing the history of October crashes. The head of research asked her to test the idea with 30 years of index data.
The test showed that October returns were positive in most years, with an average close to the other months, although the swings were larger. Moving to cash would also have meant missing the strong rebounds that often follow a fall. The firm decided to keep its allocations steady and to use October only as a reminder to check that clients' cash reserves matched their needs.
The wider point for Greenfield was about discipline. Its investment committee agreed that any seasonal idea must be tested on at least 20 years of data before it can influence a client portfolio, and that the test must include costs and taxes.
Watch out
Common mistakes.
- Treating a few famous crashes as proof of a rule. Dramatic events are remembered, but they do not show that October is worse on average.
- Selling in September to avoid October. This can mean missing gains, paying costs and creating a tax bill.
- Confusing volatility with decline. October often has large swings, but those swings include rises as well as falls.
Questions
People also ask.
Is there evidence for the October effect?
Studies find that October can be volatile, but its average return is not reliably lower than other months.
Why do people believe in it?
A small number of major crashes happened in October, and vivid events are easier to remember than quiet months.
Should a company avoid raising money in October?
Not because of the calendar alone, since market conditions and the company's own results matter far more.
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