October Is the Most Feared Month for Investing, Should You Worry?

October is known as the scariest month and not just because Halloween marks its end, horror movies top the box office, and haunted houses spring up across the nation. It also has a negative connotation for investors because several historic stock market drops have occurred during the month.

The bank panic of 1907, the stock market crash of 1929, and Black Monday of 1987 all occurred during the month of October, giving rise to the term “the October Effect.” Many investors believe that October is an unlucky month for investing, though the statistics do not bear that out.

Historically, September has been the worst month for investing. From 1928 to 2020, the average monthly return in September in the S&P 500 was -1%, by far the worst month. May and February are tied for the second worst, with -0.1% monthly returns. October, by contrast, had an average of +0.4% return.

October has also had 54 up years during that time, compared to 38 down years, while September has had 42 up years compared to 49 down years. No other month has had more down years than up years during that period.

That trend also looks set to continue, with the stock market having a rough past couple of days, including the biggest drop since June 2020. It will take a significant rebound in the second half of September to reverse the trend. September 2021 was also a bad month for investors.

If you are wondering what is the best performing month, it is April. Though taxes are paid that month, many Americans overpay on their taxes and receive a rebate, pumping money into the economy and inflating stock prices. December and January are also good performing months.

Ironically, it may be the “October Effect” that is affecting September. Perception does not always become reality, but investing perception almost always affects reality. It is possible that investors remove their money in late September, fearing another “black day” in October, driving the stock down.

While October has performed relatively well, it is worth looking into how many major drops happened in the month. After all, even if October performs relatively well on average, investors could have a reasonable fear if the month has major crashes regularly, even if the month performs well overall. But that fear looks to be mostly unfounded.

Black Wednesday occurred in September 1992, after George Soros raided the British pound. The crashes in 2001 and 2008 were both larger than 1987 October’s Black Monday and happened in September. The Dot-com bubble burst in March of 2000, but, it should be noted, the stock market did not bottom out until October of 2002.

As for October 2022, no one knows what will happen, and this is not The Motley Fool, Sputnik is not a stock prediction website. However, there are some indications that October could be a bad month for investors. It is worth noting that the catalysts for both the 1907 and 1929 crashes occurred in September though the actual crashes happened in October.

Inflation is extremely high at the moment. Supply chain issues remain a problem. The Federal Reserve is increasing interest rates rapidly, a strategy mirrored by central banks around the world. And there is still the looming possibility of a rail workers strike. While union leaders and rail companies have reached a tentative agreement, it still requires approval by the rank-and-file members, something that may not be easy, according to labor experts. The vote is expected to be completed in October, for better or worse.

All that adds up to is an economy that is teetering on the edge, possibly set for a big fall or newly regained footing. The “October Effect” may be a superstitious belief that isn’t reflected in the statistics, but investors might be wise to proceed with caution.