The month of October has become a legend among those who follow the market closely, with a history of crashes known as the October effect often striking fear that a downturn is imminent when autumn weather starts to roll in.
The October effect is basically this idea that the market tends to have a bad month in October, according to EJ Antoni, research fellow for Regional Economics at the Center for Data Analysis at The Heritage Foundation.
The idea of October being the most feared month in the financial calendar is disputed by the fact that it is a disputed topic. While the month has seen legendary crashes such as the Panic of 1907, Black Tuesday, Black Thursday and Black Monday in 1929 and Black Monday in 1987, the overall data points to October being a month like any other.
According to an analysis of the month by LPL Financial, October has historically been the most volatile month for markets during the year, with the most swings of more than 1% in either direction. October has seen more bear markets end than in October, while September has produced more down markets without earning a nickname.
The data suggests that October has gotten unlucky with its history of crashes, that may just be the result of bad luck for the month.
It's amazing how many horrible declines in the Dow happened in October, Antoni said. These things are more likely to be a coincidence than anything else. If you look at the events that caused the severe monetary contractions in previous panics, they had nothing to do with the calendar. Antoni pointed out that October's bad reputation may have originated even earlier than the 1907 crash, pointing out the credit crunch of the agricultural economy of the 19th century. An economy that was centered around farming had predictable cycles that came to a head in October.
Farmers need loans at the same time to buy seeds, to buy fertilizer, for their crops, Antonio said. After that, the crops were all coming to market at the same time. Because the economy was having these system-wide shocks, those shocks were in fact seasoning and part of the phycology of the October effect comes from, he said.
Antoni believes that October could live up to some of its reputation in 2022.
This year looks like it might live up to the reputation, whether it is deserved or not, according to Antoni. There isn't much going on that indicates an increase in growth whether or not we're talking about the American or global economy. Antoni believes that the U.S. economy could grow for the third quarter this year, but October may be the beginning of a bad economic stretch.
He said that he doesn't see any growth on the Horizon. One of the main drivers behind our at least anemic economic growth is our exports. Our exports are about to start declining because of the dollar's strength relative to other currencies. When you have a strong dollar, it makes it more expensive for foreigners to buy our products, our exports. That's going to decrease exports, which also decreases GDP gross domestic product.