This October will be no different. In a month traditionally riddled with uncertainty, investors are surely erring on the side of caution. It is when risk assets have often reverted to the downside – a market anomaly known as the October effect.
But is all this talk of doom and gloom just one big misconception? Or will trick-or-treaters be the only ones indulging this October?
Is it all just one big superstition?
It is easy to empathise with investors that dread October. After all, some of the worst days in stock market history happened during this month.
But if there’s any consolation, statistical evidence suggests it may all be coincidental. Is October really that much more susceptible to market downturns than any other month of the year?
The fact of the matter
The notion that stock markets will exhibit sharp declines in October is likely a financial superstition more than anything else. Data going back to 1964 shows the S&P 500 Index has only been negative 40% of the time over the last 55 years, with the average return in October far exceeding the average monthly return (based on all 12 months of the year).
Did you know?
| S&P 500 Monthly Performance since 1964 | |||
|---|---|---|---|
| Month | Avg. Return* | # of positive years (%) | # of negative years (%) |
| January | 4.4% | 34 (61%) | 22 (39%) |
| February | 2.8% | 31 (55%) | 25 (45%) |
| March | 3.1% | 36 (64%) | 20 (36%) |
| April | 2.8% | 41 (73%) | 15 (27%) |
| May | 2.7% | 32 (57%) | 24 (43%) |
| June | 2.4% | 32 (57%) | 24 (43%) |
| July | 3.8% | 28 (50%) | 28 (50%) |
| August | 3.2% | 31 (55%) | 25 (45%) |
| September | 2.9% | 27 (49%) | 28 (51%) |
| October | 4.3% | 33 (60%) | 22 (40%) |
| November | 3.5% | 37 (67%) | 18 (33%) |
| December | 2.7% | 39 (71%) | 16 (29%) |
| Average | 3.3% | 33 (60%) | 22 (40%) |
Source: Data via Refinitive *Data in US$ terms, excludes dividends
September has actually been far more tumultuous than October, having yielded negative returns more than 50% of the time since 1964 (as opposed to just 40% of the time for October).
Time in the market is always better than timing the market
Nobody knows for certain whether October will be a difficult month in the markets. As shown above, market downturns can happen at any point in time during the calendar year. However, one thing is for certain: timing the market is always challenging.
The goal of any investor should be to have a longterm investment approach. Having a diversified portfolio of asset classes could limit the adverse impact of market corrections, regardless of the day, month or season!
