January Effect and October Effect, Are They Real?

By Pinyo, on October 29, 2007

Market timing does not work ⁽¹⁾. However, there are still plenty of investors who believe in market timing, and a subset of these believe that January Effect and October Effect are real. In a true MythBusters‘ fashion, I did some historical data analysis and have a few statistical factoids to share with you. But first…

What is the January Effect?

Some people believe that stock prices generally increase during the month of January, because people are buying back stocks after end of the year sell-off by investors harvesting tax losses.

What is the October Effect?

There’s a theory that stocks tend to decline in October, because it’s cursed. Coincidentally, the dates of some large historical market crashes occurred during this month — for example, Panic of 1907, Wall Street Crash of 1929, and Black Monday, October 19, 1987.

Now let’s look at the data from the past 30 years

You can skip this table if it gives you migraine.

The table above shows us monthly performance of the S&P 500 for the past 30 years:

• Declines are noted in red and worst month of the year in yellow
• Gains are noted in black and best month of the year in green

Here are some quick factoids based on the data above

• October 1987 was the worst month, and January 1987 was the best
• 2002 was the worst year, and 1995 was the best
• On average, September was the worst month, and November was the best
• July has the most declines at 17 down months, and December has the most ups at 24
• August has the most worst months, and October has the most best

Even if you’re sure you see an unmistakable trend, don’t bet the farm on it, because other people sees it too. The efficient market hypothesis dictates that you can’t take advantage of any such trend. For instance, after reading this post you (and everyone else) think August is the best time to invest, then next year people will anticipate the sharp gain in August and invest in July instead, and so on and so forth…

Note: (1) There are a few exceptions of timing that work — e.g., tax-loss harvesting and timing mutual fund buys to avoid capital gains distributions.

Carnivals

• This article was featured in the Carnival of Personal Finance #125 hosted by My Two Dollars. For more information please visit the Carnival of Personal Finance.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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1. Presenting The Carnival Of Personal Finance #125 | My Two Dollars