(BFM Bourse) – The turmoil that reigns in world stock markets in early autumn seems to give credence to the bad reputation of the month of October, due in particular to the crashes of 1929 and 1987. But “the October effect”, as calls him in English, it is more a cognitive bias of investors who overestimate the possibility of a fall in stocks this month than a statistical reality.
Undermined by a host of fears combining the economic slowdown, runaway inflation, exploding energy prices and rate hikes by central banks, investors are dubious and indices are in trouble. Especially since the ambient darkness can potentially add a calendar effect due to the sulphurous reputation of the tenth month of the calendar year.
“On a technical level, the beginning of October is making investors more and more tremble”, observes John Plassard, investment director at Mirabaud, who evokes “The October effect”, an anomaly, at least as perceived by certain market players. Those who would like stocks tend to fall during the month of October.
A cognitive bias rather than a tangible phenomenon
However, this effect is considered a cognitive bias and not a verifiable phenomenon, and most statistics go against this theory (September, for example, has had more bearish months for almost 100 years than September), this “effect October” refers primarily to the fact that some of the great crises of the modern period took place during this month.
Among the events that forged October’s bad reputation, John Plassard cites in particular the American banking panic of 1907, the Black Tuesdays, Thursdays and Mondays of the 1929 crash, and then the “Black Monday” crash of 1987, during the which the Dow experienced its biggest daily drop, falling 22.6%. Extreme events, to which is added the economic and financial crisis of the fall of 2008, with the bulk of the fall in the markets occurring during the first week of October (-18% for the Dow Jones during the week of October 6) .
But it is clear that despite the occurrence of these crashes, the S&P 500’s performance in October is still better than it has in February, May or September on average since 1928.
Most volatile month for stocks
What is certain, however, “is that October is traditionally the most volatile month for equities,” says John Plassard, who points to a study by LPL Financial according to which there are more variations above 1% for the S&P 500 in October. than in any other month of the year since 1950.” This can be attributed in part to the fact that October comes before the early November (midterm and presidential) elections in the United States every two years.
Among Wall Street’s most popular calendar effects, along with the Christmas rally and the “Sell in May and Go” (or its corollary, the Halloween effect), the October effect is also known as the “Mark Twain effect.” to a famous phrase of the writer in his novel The tragedy of Pudd’nhead Wilson and the comedy of two extraordinary twins: “October is one of the especially dangerous months to speculate on stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
While this statement is clearly tongue-in-cheek and implies that speculation is always dangerous, the fact that Mark Twain begins with the month of October can be considered an odd coincidence since the novel in question dates from 1894 and thus predates to all the stock market crashes mentioned.
It is still too early to assess any “October effect” on the markets in 2022. The Paris Stock Exchange closed the first week of October with a 1.8% gain. The rest of the European markets also closed this week in the green after a disastrous month of September. On Wall Street, the Dow Jones, S&P 500 and Nasdaq also managed to stay in positive territory on a weekly basis despite a clearly bearish close on Friday night.
The rise in the indices at the beginning of the week thus made it possible to limit the damage, with investors betting on a relaxation of the tone of the US Federal Reserve regarding its rates. Hopes that were later dashed by a better-than-expected jobs report on Friday…
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