Share markets remain jittery. Should investors be worried about the October effect?

October has a notorious reputation for being a bad month for investors.

In fact, if you search for media articles written over the past fortnight you will find plenty of references to “the October effect”, linking the month of October to past share market crashes.

They are difficult to dispute, because a number of the biggest market corrections in history going back over 100 years have indeed occurred in October. Yet, on closer examination, it’s clear that while all these events did happen during October, they occurred for very different reasons.

October downturns

The Panic of 1907, also known as the Knickerbocker Crisis, saw the New York Stock Exchange fall almost 50% in October of that year after numerous runs on banks and trust companies.
The Wall Street Crash on 29 October, 1929, which triggered the Great Depression, was also sparked by panic selling as nervous investors moved to cash in their shares amid fears the market may fall very soon. As a result of the mass selling activity, it did.
Large-scale computer-driven selling was the main driver of the October 1987 Market Crash (also known as Black Monday), which wiped more than 30% off the value of the Australian market over four successive trading days.
Following the collapse of U.S. investment bank Lehman Brothers in September 2008, global markets fell heavily in October 2008. This marked the beginning of the Global Financial Crisis.
More recently, in October 2018, global markets fell almost 6.5% because of rising interest rate concerns at the time and lower company earnings forecasts.

So, what should investors take away from this list of October meltdowns, especially at a time when global share markets seem to be particularly volatile?

Share market gains recorded over the first half of 2023 have largely been eroded, even though the U.S. share market is still above where it was at the beginning of the year. This is despite growing recession fears there.

Much of the current volatility is being triggered by weaker economic conditions. Expectations that further interest rate rises will be needed to quell inflation levels have tempted many investors to switch their capital from equities into government-backed bonds paying attractive yields.

On the Australian Securities Exchange (ASX), year-to-date investor cash inflows into exchange traded funds (ETFs) that invest in bonds have exceeded the inflows into equities ETFs.

Just another month

Yet, the reality is that the month of October is no more prone to market downturns than any other month of the year.

Famous U.S. author Mark Twain (1835-1910) summed up the behaviour of share markets during October very well in his 1894 novel Pudd’nhead Wilson.

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February,” he wrote.

Over the course of 2023, to the end of September, the S&P/ASX 200 Index had delivered negative returns in five out of the nine full months, according to ASX data.

It’s also worth taking a look at the monthly performance of the S&P/ASX 200 Index over the last five years, with the table below showing a mixed bag of October returns since 2018. While there was a fall of almost 6.5% in October 2018, in October 2022 the Australian market rose 6%.

October really isn’t the only time when markets can become spooked.

Between March 2001 and October 2002 the technology-dominated Nasdaq Composite Index fell by more than 75% as the overvalued share prices of internet stocks plunged. This became known as the dot.com crash.

Then, between February and March of 2020, the Australian share market dropped more than 35% over about 20 trading sessions. The so-called Covid Crash was short-lived however, with the share market quickly rebounding to deliver strong returns for equities investors by the end of 2020.

Stay focused on the long term

The most important point for investors is that share markets can experience corrections at different times for many different reasons.

The smart strategy is to stay invested and well diversified, leveraging the combination of compounding returns and low investment costs, which together really add up over the long term.

The Australian share market delivered a 9.2% per annum average annual return over the 30 years from 1 July 1993 to 30 June 2023. The 2023 Vanguard Index Chart shows how Australian shares performed against other asset classes over this period.

Markets will rise and fall, sometimes quite sharply. But for most investors, trying to time when share markets will rise or fall is generally a losing strategy.

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