It is at this time of year that we start to hear about the October effect on the market and how it is the scariest month in the calendar year for investors, writes Dale Gillham.
Currently, the All Ordinaries Index is down just over 6% and with just five trading days left in September, investors are wondering if the Australian stock market will have a meltdown in October.
To fuel the fear, stories will be written about the black Tuesday crash in October 1929 and the black Monday crash in October 1987 but is October really a month that investors should fear?
Looking at the data over the last 40 years since 1982, October closed down 14 times, which means statistically October is likely to rise 65% of the time.
When comparing this to September and November over the last 40 years, each month closed lower on 20 occasions, meaning there is a 50% chance that they would end in positive territory.
That said, the market has only risen and fallen across all three months on four occasions, but October has had the largest swings in price with the highest being 10% while the biggest fall was 42.45% in October 1987.
Unless we see a significant rise this week, September 2022 is likely to close down and outside of the four times all three months fell together, only five times in the past has October ended the month down after September fell. That means statistically speaking next month has a 77% chance of closing up.
Looking at more recent history since 2000, following a down month in September, October has only closed lower on three occasions one of which was during the GFC while the others occurred in 2000 and more recently in 2018.
Given this, there is an 86% probability that October 2022 will close up for the month. While I am not ruling out that October could end in negative territory, the statistics indicate that we do not need to fear October.
- Dale Gillham is chief analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au