Should you be worried about the “October effect”?

By Kim Iskyan

October is home to more than one frightening American (and, increasingly, global) tradition. Halloween is about ghosts, ghouls and goblins. And - more to the point - October also has a reputation as one of the scariest months for U.S. - and global - investors.

Over the past few decades, the month of October has seen some of the biggest stock market crashes of all time, like the Wall Street Panic (1907), the Great Depression (1929) and Black Monday (1987)… when the Dow dropped 22 percent in just 24 hours.

The "October effect", as it's known, has been spooking investors for decades. But, as with all horror stories, the truth is a bit more complicated - or, different.

For starters, regarding the three crashes mentioned above: Two of them started in September… and the real action didn't happen for a few weeks. So October isn't completely to blame.

How the market has historically performed each month

As shown in the table below, since 1927, in an average month the S&P 500 has moved up 0.8 percent. It's posted a positive return in 62 percent of all months. The worst months in this respect - that is, the months with the lowest percentage of positive returns - have been February and September, with just 53 percent of all monthly returns in the positive column.

The average monthly return for September, at -0.6 percent (negative, despite the fact that more than half of all Septembers have posted a positive return) is by far the worst of any month. October, by comparison, has been positive 62 percent of the time… with a much healthier average return of 0.5 percent.

The best-performing month on average has been December. It has seen positive returns 79 percent of the time since 1927… with an average return of 2.0 percent.

So for the S&P 500, September - not October - is actually the worst month.

What about Asia?

For the MSCI Asia ex Japan Index since 1987 (when the index was created), August has been - by far - the worst-performing month, with an average return of -2.4 percent since 1987. The month has seen a positive return just 33 percent of the time, compared to 55 percent for all months (and an average monthly return for the entire period of 0.8 percent).

September has been the second-worst performing month on average, with an average return of -0.6 percent (although the month saw positive returns 57 percent of the time). October, by comparison, has been one of the better-performing months, positing an average positive return of 2.0 percent, and a positive return overall during two-thirds of all Octobers since 1987.

The best-performing month for the MSCI Asia ex Japan Index has (like the S&P 500) been December, with an average return of 2.8 percent.

So what does all this mean?

October has historically been one of the poorer-performing months for the U.S. and Asia. But September (for the S&P 500) and August (for the MSCI Asia ex Japan index) have actually been worse.

But this kind of computation is more for fun… and shouldn't be the foundation of a market-timing strategy. Pulling out of the market altogether can be disastrous… not least because (mis)timing the market can mean missing out on the weeks when it performs well. And as we've shown before, that can do enormous damage to a portfolio, because it means missing out on the magic of compounding.

What matters more is practicing smart risk management by watching your stop loss levels carefully. Yes, you might miss out on some of the best weeks. But by missing out on a bigger correction, you'll have done your returns a far larger favour.

 

Kim Iskyan
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets. He's been quoted in the Economist, The New York Times, the Wall Street Journal, Barron's, and Bloomberg, and has appeared on Fox Business News, China Central Television, and Bloomberg TV, and has written commentary for the Wall Street Journal, Slate.com, Salon, TheStreet.com, breakingviews.com, and other publications. For more of his insights, Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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