October Effect

Author:

Moneyzine Editor

1 mins

November 6th, 2024

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Definition

The term October effect is used to describe a theory that states financial markets typically decline in the month of October. The October effect is believed to be a result of the psychological impact the stock market crashes of 1929 and 1987 have on investors.

Explanation

Financial markets, such as commodities, bonds, and stocks, typically demonstrate an upward or downward trend over time. The October effect is a hypothesis that states financial markets in general, and stocks in particular, typically decline in the month of October.

The October effect is a psychological phenomenon, and is likely a result of the stock market crashes of 1929 and 1987. The stock market also declined in October of 2008, which marked the start of the Great Recession. Empirical evidence suggests September actually provides investors with the worst returns. For example, over the 50-year period from January 1960 through December 2009, the S&P 500 Index provided investors with a -0.90% return. The month of October provided investors with a return of 0.51%. In fact, the S&P 500 rose 31 times in the month of October and declined only 19 times.

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