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The prospect of steep market declines worries investors – and the month of October has a particularly bad reputation in this respect.
Although the month of October delivers an acceptable performance in seasonal terms if one disregards outliers like the crashes of 1987 and 2008, these particularly strong declines over such short time periods are nevertheless scary: what use is it to anyone if the market performs well in October several times in a row, but then generates such a large one-off loss that all previous gains evaporate? And what about intermittent losses?
October is the most dangerous month
Let us examine these extreme market moves more closely. The following chart shows the 20 largest one-day declines in the Dow Jones Industrial Average. Crashes that occurred in October are highlighted in red.
The 20 biggest one-day declines in the DJIA
Extremely strong one-day declines happen particularly often in October. Source: Wikipedia
9 of the 20 strongest declines occurred in October. That is an extremely disproportionate frequency. In other words, October has a strong tendency to deliver negative surprises to stock market investors – in the form of sudden crashes.
Outliers are “real” as well
Things look quite differently in the first half of the year. Only two of the 20 largest declines have taken place in these six months.
As investors, we must not allow ourselves to be deceived. Even though such extreme price declines are rare, they do exhibit seasonal tendencies as well.
While it is more likely that gains rather than losses are generated in most years, the losses frequently turn out to be exceptionally large.
October mainly sees sideways moves
Thus, while large price declines frequently happen in October, it is at the same time actually not a weak month overall.
In order to illustrate this, a seasonal chart of the Dow Jones Industrial Average encompassing a very long time period is shown below. Contrary to standard price charts, seasonal charts do not depict actual prices over a specific time period. They rather show an average of prices over a large number of years in relation to the time of the year. The chart below illustrates the average price pattern of the DJIA calculated over a span of 117 years. The horizontal axis depicts the time of the year, the vertical axis shows the price information.
Dow Jones Industrial Average, seasonal price pattern over the past 117 years
On average the market actually moves sideways in October. Source: Seasonax
The chart illustrates the typical seasonal price pattern of the DJIA. As can be seen, statistically the weakest month is actually September rather than October. In the course of October the market tends to move sideways on average. Net-net it even exhibits a small gain, albeit a well below average one. Nevertheless, October delivers a better average performance than its reputation among stock market participants would suggest. Of course this reputation is not entirely undeserved, as it stems from the fact that particularly large short term declines actually do frequently occur in October.