Many perceive October as a special month in the financial world as it is one of the most feared months in the financial calendar. People usually use the terms of the October effect to indicate this situation.
The fear originally comes from many financial disasters happening on Octobers. Let’s take a look at those disasters.
The panic of 1907
Consequently, there were multiple bank runs and heavy panic selling at the stock exchange. Specifically, the panic took hold mainly on trust companies.
Primarily, it was caused by a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors.
All that stood between the U.S. and a serious crash was a J.P. Morgan led consortium that did the work of the Fed before the Fed existed.
Crash of 1929
The Crash of 1929 was bloodletting on an unprecedented scale because so many more people were involved in the market. Consequently, it left several ‘black’ days in history books. While each of them had their own record-breaking slides.
Also read: Over-Trading, Your Biggest Mistake!
Nothing says Monday like a financial meltdown. In 1987, automatic stop-loss orders and financial contagion gave the market a thorough throttling as a domino effect echoed across the world.
The Fed and other central banks intervened and the Dow recovered from the 22% drop quite rapidly.
These three crises was significantly affected by the world economy. Therefore the world economy also experience more crisis in October than any other month.
In the end that creates a psychological expectation that the market will always drop in October. Therefore, many people expecting to see lower stock prices every October.