Why Does the Stock Market Go Lower in October?

Black Tuesday is the title assigned to the second day of the stock market crash in 1929.

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Investors' expectations have the ability to determine stock market performance, and unfortunately, this can work against equity prices. Since the early 20th century, the month of October has been associated not only with a lower stock market, but also prolonged bear markets, in which the stock market loses one-fifth of its value or more, and economic recessions. This has created a foreboding for market losses among investors when the calendar reaches the month of October each year.


When the stock market crash of 1929 occurred, it took investors by surprise. Weeks before the crash, the stock market reached a new high, and stock prices were 25 percent higher than in the previous year. By October, however, underlying weakness in the economy became apparent, and stocks lost nearly one-quarter of their value over two days, costing investors billions of dollars. This market crash ushered in that era's Great Depression, and the month of October has served as a constant reminder to investors of how quickly fortunes can reverse.


Considering that one of the worst months for the stock market is in September, it is not all that surprising that selling momentum would continue into October. Indeed, during the month of September, the S&P 500 Index -- an index that reflects trading in some of the stock market's biggest companies -- declined 5 percent or more in four of the 10 Septembers of the decade leading up to 2010. In the years when stocks advanced in September, the stock market advanced nearly 2 percent during the month of October.


October has secured a place in history as the fourth worst month for the Dow Jones industrial average and the S&P 500 Index, two of the stock market's major averages. The "Stock Traders Almanac" has labeled October a jinx because of the frequency of market crashes that have occurred in the month, according to a 2012 "USA Today" article. The worst October ever was in 1987, when the stock market declined more than 23 percent.

Emotions and Seasons

Investors' emotions can turn negative when the calendar changes from summer to fall, and this influences stock market performance. In the fall months, after summer vacations are basically over and the sun sets earlier, investors' moods lean toward the gloomy. As a result, negative economic or market developments in these months can cause overreactions, according to a 2009 MSNBC article. If investors were contemplating selling stocks before, a negative development can make the decision easier and motivate investors to dump shares.