In early October 1997, David Smith was warning investors that October had historically proved to be a dangerous time for markets. Subsequent events proved him right, though the so-called ‘October effect’ theory has been largely debunked.
Be careful of October, warned David Smith, economics editor for The Sunday Times, in this article written in Professional Investor, in 1997. Smith argued that for equity markets, historically October had been a dangerous month. In 1997, there was particular reason for concern. It was the 10th anniversary of the crash of 1987, and investors were nervous. There were worries about economic overheating, and the fall of the Far East ‘tiger economies’.
In fact, just weeks later on October 27th, there was a so-called ‘mini-crash’ of global markets, and so Smith’s warning was not misplaced.
So should we really worry about the month of October? The Panic of 1907 occurred in the month of October, as did Black Tuesday and Black Thursday in 1929. But the collapse of Lehman Brothers in 2008 occurred in September, and more market participants feel the statistics don’t support a real ‘October effect’.
Plus, as Smith argued, it’s good to take the long view. “But there is also the reassuring fact that, if you pull off a chart of the Dow Jones Industrial Average or FTSE 100 now, the crash of 1987 barely looks like a blip on it. Anyone scared away from equities by the crash would have lost hugely by staying out too long. In the long-run, the stock market does well.”