October Effect: Definition, Evidence, and What Investors Should Know

Key takeaways
* The “October effect” is the belief that stocks tend to fall in October.
Historical data do not support it as a reliable anomaly; over the long run October has been slightly positive on average.
October is unusually volatile—more large daily swings have historically occurred in October than in other months—so memorable crashes have reinforced the myth.
* Investors should not base trading decisions solely on the calendar; a contrarian approach can create opportunities when others act on fear.

What is the October effect?

The October effect is a calendar-based market superstition that stocks decline more often (or more sharply) in October than in other months. It grew out of high-profile market crashes that happened in October, such as the Panic of 1907, the 1929 crashes (Black Tuesday/Thursday), and the 1987 crash (Black Monday). Those events created a lasting psychological association between October and market calamity.

Why the idea persists

• Salient events: Large, dramatic crashes are easier to remember and get labeled (e.g., “Black Monday”), making October appear exceptionally dangerous.
• Media and narrative: Repeated references to past October disasters reinforce expectations of trouble.
• Behavioral bias: Investors prone to pattern-seeking and loss aversion overweight those memorable down months.

Historical perspective and volatility

• Memorable crashes in October:
• Panic of 1907 — a run on trust companies culminated in October after earlier confidence erosion.
• 1929 crashes — key policy moves and rising rates earlier in the year precipitated the October collapse.
• Black Monday (1987) — a single-day percentage drop that remains one of the sharpest on record.
• Volatility: October has historically shown more frequent large daily moves (1%+ swings in the S&P 500) than other months, which helps explain its fearsome reputation.

What the statistics say

• Long-run averages do not support a persistent October decline. Over many decades October has been, on average, slightly positive (roughly a few tenths of a percent to around 0.6% depending on the dataset and time span).
• September—not October—has tended to be the worst-performing month on average.
• Once an anomaly becomes widely known, it tends to weaken as market participants trade around it, so calendar effects often dissipate over time.

Practical implications for investors

• Don’t trade solely on the month: Basing buy/sell decisions on the calendar alone is not a sound investment strategy.
• Use volatility, not superstition: Expect higher volatility in October and adjust position sizing and risk management accordingly.
• Look for opportunities: Pervasive fear can create contrarian buying opportunities for disciplined investors with a long-term horizon.
• Focus on fundamentals and plan: Asset allocation, diversification, and a clear investment plan matter far more than calendar-based myths.

Bottom line

The October effect is more folklore than a robust statistical phenomenon. October’s reputation comes from a handful of dramatic historical crashes and the month’s elevated volatility, not from a reliable pattern of losses. Investors should recognize the psychological origins of the myth, manage risk for potentially higher volatility in October, and avoid letting calendar-based fears drive investment decisions.