UK Accounting Glossary
The October effect is a theory that stocks decline during the month of October. Although there is little statistical evidence to support the October effect, proponents of behavioural finance note the power of mass psychology to move markets. If enough investors subscribe to the October effect and act on their beliefs, stocks will indeed decline in October and the October effect will become a self-fulfilling prophecy. Those who believe in the October effect argue that many if not all the major stock market crashes have happened during October. The crash of 1929 occurred in October and is considered a classic example of the October effect. Believers in the October effect also point to the crash of 1987 which took place on October 19th. For the record, the worst-performing month from 1930-2004 was September (S&P 500 averaged a 1.28% loss), while the October effect actually netted investors an average 0.67%.
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This glossary post was last updated: 7th February 2020.