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Shocktober 😱

Shocktober 😱
By Making smalltalk • Issue #26 • View online

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February”
Mark Twain wrote the above in his relatively less popular novel Pudd'nhead Wilson. Twain was actually an avid investor & a stock market enthusiast, though he wasn’t particularly good at it.
In fact, his equity investments (which were entirely in single stocks, since portfolio investing wasn’t available back then) effectively led him to declare bankruptcy at one point.
And perhaps, this also inspired him to write the above lines, which are now forever memorialised in the stock markets as either the “Mark Twain effect” or “October effect”.
The October effect is simply the observation that stock market returns (in the US) have been lower in October, compared to the other months
While this phenomena has been around for a while, one of the key reasons it’s become deep rooted is that the 3 most critical crashes in the history of US stock markets have all happened in October!

  1. The crash of 1929: this resulted in The Great Depression
  2. Black Monday crash of 1987: on 19th October 1987, the Dow Jones suffered a ~23% crash, the single-largest fall ever
  3. The Global Financial Crisis of 2008: it started with Lehman Brothers collapsing in September 2008, global markets really started crashing from the following month - the fateful month of October!
(If you’re interested in learning more about these financial crashes & how they shaped the world of investments, read this article)
In the investments space, these phenomena are called “calendar effects” - any stock market anomaly/observation that appears to be related to the calendar.
Some of these effects have been verified by academic research, others have no established basis yet. But all these effects are based on investor behaviour & what has been observed.
Another such popular effect is called the “January effect”, which is essentially the opposite of the October effect - the average monthly returns seen in January have been higher than other months!
One of the explanations for this is that since the US tax year ends in December, that month witnesses a lot of selling done due to tax saving purposes. However, once the new year starts, investors again line up to buy these stocks, causing prices to go up.
So, does the October effect have any empirical basis in India? We looked at the historical returns of Nifty-50 since 2005, and while there might be some smoke - there’s certainly no fire.
October Returns vs. Avg. Monthly Returns for Nifty-50 | Source: NSE
October Returns vs. Avg. Monthly Returns for Nifty-50 | Source: NSE
There have certainly been years when October has been horrible for investors. It’s also true that investors seem to earn less in October when compared to other months of the year. Yet, the average Nifty-50 returns for October have been positive over this period.
Note that extending the data set beyond might paint a different picture. But keep in mind that these are empirical observations that haven’t yet been verified/confirmed. Instead, what it provides us is with an insight into the general behaviour of investors.
After all, one of the key drivers of the stock market is sentiment - and sentiment can be based on anything, not just verified facts.
With historical crashes & Halloween, October can be a scary month. But here’s hoping that this October doesn’t turn into another Shocktober for you, me, and the entire market.
Happy investing!
-Vikas Bardia
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