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The October Effect is a theory that is based on the understanding that severe adverse events in the stock market are likely to take place during the calendar month of October. There are investors as well as financial professionals who hold very closely to this theory, sometimes to the point of taking extra safeguards to protect their portfolios for the entire month. Others feel that the October Effect is more of a superstition than a well-documented recurring phenomenon within the marketplace, and tend to do little of anything in the way of special preparation.
For those who find some validity in the concept of the October Effect, the theory is usually presented with examples of catastrophic events that have affected the stock market during the month of October. These include the events of the year 1929, when the stock market crash paved the way for what is known as the Great Depression. During the month of October, trading days that have come to be known as Black Monday, Black Tuesday, and Black Thursday all took place. The sudden crash of 1987 also took place during the month of October and is cited as proof that there is something to the October Effect.
Investors and others who do not place any particular emphasis on the October Effect will often note that while serious drops in the stock market have occurred during the month of October, the phenomenon is by no means limited to a single calendar month. Examples such as the Panic of 1837, a crash that occurred in the United States, began during the month of May. Black Friday was a crash that occurred on a Friday in May 1869. Over time, major financial events in the marketplace have occurred in virtually every month of the calendar year.
The main impact of the October Effect is that certain investors become somewhat cautious during this time of year. There is one school of thought that holds this extra caution does not help to divert disaster, but sets the stage for dire circumstance to emerge, essentially meaning that if a financial crisis does take place, it is basically a self-fulfilling prophecy. Others note that in general the events that trigger a financial crisis initiate a chain of events that may begin months or even years for a major crash, effectively rendering the designation of any one month as being inherently more dangerous than others to be more of a myth than a fact.
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