October: Bogey month for shares?

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4 Oct 2021

Best and worst months for shares
  • October has had a reputation as being a bogey month for sharemarket investors. But do the facts support this?  
  • CommSec economists have assessed data on the All Ordinaries index over time. While there are modest differences between this index and the benchmark S&P/ASX 200 index, the All Ords was chosen because monthly data stretches back to 1875. In contrast, data for the ASX 200 only extends to 1992. 
  • But while data goes back almost 150 years, the analysis was restricted to the last 70 years as clear results were achieved over this long span of data rather than extending the analysis even further.
  • Over the last 70 years, the best months for shares have been December, April, July and January. Worst months have been September (no surprise here after the performance last month) as well as June, February and November.
  •  While the All Ords fell in October in three of the past five years, these were the only three declines recorded in the past 11 eleven years. Notably if we look at September, shares have only risen once in a September month in the past eight years.
  • Over the past decade (2011-2020) July has been the stand-out month in terms of the number of increases for the All Ords (9 gains) followed by April (8 gains). And both months were consistently amongst the strongest over the past 70 years
  • The positive sharemarket performances of April and July over time may reflect the fact that these months are not at the end of the quarter, a time – especially late in the quarter – when institutional investors may engage in profit-taking and book-squaring.
  • So how does that explain another leading month for sharemarket gains – December – as well as January? Positive sentiment in the festive month (December) as well as optimism for the coming year (January) are possible explanations for the consistency of sharemarket gains in these two months. 
October has been a volatile month
  • October is not amongst the months that have been consistently ‘good’ or consistently ‘bad’ for the sharemarket over time. Still the All Ords has recorded only modest average gains of 0.3 per cent in October over time, below the average monthly gain of 0.6 per cent. 
  • This may reflect big sharemarket declines in October in 1987, 1997 and 2008. Over the past 30 years, gains have averaged 0.9 per cent in October, ahead of the 0.6 per cent average for all months.  
  • But the data certainly shows that October has been a volatile month. In October some of the biggest daily declines for the All Ords have been recorded – notably 1929, 1907 and 1987. Certainly the biggest daily fall in the modern era occurred on October 20, 1987 (-25 per cent). Four of the biggest daily declines in the All Ords happened in October 1987. But note also October 10, 2008 (-8.2 per cent); October 16, 1989 (-8.1 per cent) and October 28, 1997 (-6.8 per cent).
  • But there have also been big daily gains in October as well. The biggest daily gain in the past 40 years was October 20, 1980 (+6.9 per cent). But other notable gains in October were October 29, 1997 (+5.9 per cent); October 28, 1987 (+5.5 per cent); and October 13, 2008 (+5.1 per cent). 

Why is October volatile?

  • Assessing the data over time is the easy part. Trying to work out why certain months are more positive for the sharemarket or a period of greater volatility is more difficult. . 
  • Many analysts believe the so-called ‘October effect’ is more psychological rather than reflecting actual real-world influences. Given the size of sharemarket declines in 1929, the period has always being observed by media and investors alike. This observance can lead to nervousness amongst investors. And that nervousness was exacerbated even further by the 1987 sharemarket crash.
  • The influence of the US on the Australian sharemarket has to be acknowledged and that is where any explanation for an October effect may reside. There is a saying in the US “sell in May and go away” reflecting a tendency in the past for US investors to sell before gaining on summer holidays. Researchers had found higher sharemarket returns for November-April compared with the May-October period. But more recent data hasn’t supported the theory.  
  • At the end of the day it’s important to notes that past performance isn’t a reliable guide to future returns. Investors always need to be alert and not alarmed and be guided by economic and company ‘fundamentals’. 

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This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

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