Many investors share different phenomena that surround stock prices in a certain month. There’s the January Effect, October Effect, Monday Effect, and many other ideologies that traders use as a scale of whether to invest, sell, or trade stocks during certain periods. So, is October a good month for stocks?
The month of September is viewed by some people as a dangerous month to conduct trading activity. This year, September definitely had high amounts of volatility for various stocks. Investors hope that October will be the month that these stocks rebound, but how will they actually perform?
What is the October Effect?
There are many market participants that view October as a month where stocks will decline, and this expectation is known as the October Effect. While there are various statistics that deem the effect to be just a myth, many historical market crashes have happened in October. The events date back over a century, and they have helped fuel the October Effect theory.
We'll discuss some historic events that had a significant impact on the market.
The Bank Panic of 1907
The Bank Panic of 1907 was one of the first significant events that took place in October. During this event, the New York Stock Exchange fell nearly 50 percent from its peak the previous year. It was a three-week period that started from mid-October of 1907 and lasted until early November that year.
What sparked the panic was a planned scheme to cause a short squeeze for shareholders of mining firm United Copper Company. Otto Heinze, who had his own brokerage firm, led the scheme. Various types of banks across the country would lend out money and contribute to the scheme.
When the plan failed, the banks suffered along with affiliate banks and trust companies. One of the trust companies that suffered was the Knickerbocker Trust Company, one of the biggest trust firms in U.S. history, and it ultimately led to its downfall.
The Wall Street Crash of 1929
Also known as The Great Crash, the 1929 Wall Street crash was caused by multiple factors including low wages, amassing debt, agricultural deficiencies, and the U.S. stock market expanding too fast. After stock prices increased for most of 1929, they started to decline in September and early October.
The prices continued to decline in October. On Oct. 24 that year, investors panicked and there was a record of 12,894,650 shares traded that day. That day would infamously be called Black Thursday. The next day, investment firms and large banks boosted stock prices in an attempt to stabilize the market by buying large sums of stock.
Although stock prices did see increases that Friday, stock prices fell again the following Monday, which gave it the name Black Monday. Stock prices would take a monumental nosedive the next day and 16,410,030 shares were traded on the day that’s now called Black Tuesday.
Is October a good month for stocks?
There’s a strong possibility that stock prices could be just as volatile in October as they were in September, according to MarketWatch. While there's wide speculation as to why October can be a volatile month, it could be because traders expect the month to be volatile. Whether or not the volatility will be beneficial for trading depends on the individual or entity.