Cac 40: Is October Really the Worst Trading Month?

(BFM Bourse) – The turmoil that reigns on the world stock markets at the beginning of autumn seems to give credit to the bad reputation of the month of October, due in particular to the collapses of 1929 and 1987. But the “October effect”, as it is called in English, it is more of a cognitive bias of investors who overestimate the possibility of a decline in stocks during this month than a statistical reality.

Undermined by a series of fears that combine economic slowdown, runaway inflation, explosion in energy prices and central bank rate hikes, investors are doubtful and indices are in trouble. Especially since 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 makes investors tremble more and more”, observes Mirabaud investment director John Plassard, who evokes “The October effect”, an anomaly, at least such that some market participants perceive it. , which they would like stocks to tend to drop during the month of October.

A cognitive bias rather than a tangible phenomenon

However, this effect is considered to be cognitive bias and not a verifiable phenomenon, with most statistics at odds with this theory (September, for example, had more bearish months for nearly 100 years than September). October), this “October effect” mainly refers to the fact that some of the great collapses of the modern period took place during this very month.

Among the events that forged the bad reputation of October, John Plassard cites in particular the American banking panic of 1907, the Black Tuesdays, Thursdays and Mondays of the 1929 crisis, then the “Black Monday” of the 1987 crash, during which the Dow experienced its largest daily decline, down 22.6%. Extreme events, in addition to the economic and financial crisis of autumn 2008, the bulk of the fall in the markets that occurred in the first week of October (-18% for the Dow in the week of 6 October).

But it is clear that despite the occurrence of these crashes, the performance of the S&P 500 in October remains better than in February, May or September on average since 1928.

The most volatile month for equities

What is true, however, “is that October is traditionally the most volatile month for equities,” notes John Plassard, who points to a study by LPL Financial that there are more changes above 1% for the October S&P 500 than in any other month of the year since 1950. “This can be attributed in part to the fact that October precedes the early November (intermediate and presidential) elections in the United States every two years.

Among Wall Street’s most popular calendar effects, along with the Christmas gathering and the “Sell in May and Go” (or its corollary, the Halloween effect), the October effect is also known as the “Mark effect. Twain “., Referring to a famous phrase of the writer in his novel The tragedy of Pudd’nhead Wilson is the comedy of extraordinary twins: “October is one of the particularly 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 ironic and implies that speculation is always dangerous, the fact that Mark Twain starts with the month of October can be considered a strange coincidence as the novel in question dates back to 1894 – and thus precedes all 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 rise of 1.8%. The other European markets also closed this week positively 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 sharp bearish close on Friday night.

The rebound of the indices at the beginning of the week has thus made it possible to limit the damage, with investors betting on a softening of the tone of the US Federal Reserve on rates. Hopes that were subsequently dashed by a better-than-expected employment report on Friday …

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