Why October spooks investors

Halloween is a time when spooks and superstitions begin to encircle even the most rational of minds. Finance investors aren’t the first band of professionals you would equate with superstitious behaviour, with their reputation for cool, calculated, and composed decision making.

However, there are certain investment theories which blend meticulous analysis and superstition, to make traders think twice before diving into the markets in October.

Halloween Strategy

The Halloween Strategy, or as it’s also known, ‘Sell in May and go away’, is an investment technique in which an investor sells stocks before May 1, and refrains from reinvesting in the stock market again until October 31.

The benefits of this seasonal strategy? Some suggest that it’s as simple as the fact that when many investors choose to go on summer vacation, trading volume decreases. As the world’s leading stock markets are all dictated by cities in fairly similar temperate climate zones, the summer period is when most people working in business take their vacation, and less trading volume generally means less chance for high returns in the stock market.

Of course, others are more sceptical. They say it’s easy to manipulate data and results to fit a theory such as this, and the trend of more money being made outside of the May-October period doesn’t tell the whole story. The Halloween strategy remains a contentious issue in academia also, and is often ignored as a lesser-serious field of research.

However, a more recent study conducted did suggest that over a 14 year period, investment returns between November–April were larger than between May–October, in all 37 markets studied. What might have started as market superstition may have finally manifested into market reality.

October Effect

Again, the October effect is something that belongs in the realms of superstition rather than hard facts. This is the theory that stock returns tend to decrease in the month of October compared to the rest of the calendar year, despite there being little statistical evidence to back this up.

Any investor or trader with a good grounding in the history of the stock markets can probably be forgiven for feeling a little spooked by this month. It was, after all, October when the Panic of 1907 hit Wall Street. It was also the month in which Black Monday, Tuesday, and Thursday all occurred in 1929, leading to the Great Depression.

For this reason, some also brand the October Effect the ‘Mark Twain Theory’, as the author once sarcastically quipped in a novel that: "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.’’

While clearly intended as a jibe at the dangers of speculating in the stock markets, the author picked out October specifically thanks to the events that led to the great depression – which influenced much of his own writing. In addition, the great crash of 1987 also took place in October, and saw the Dow drop by 22.6% in a day. There’s enough history in October to easily spook the superstitiously minded.

Halloween Massacre

A lesser-known addition to the compendium of October investment blues is an example of a finance policy gone wrong in Canada in 2006. The ‘Halloween Massacre’s’ macabre name is probably only as gruesome as it sounds if you know your North American finance, or were an investor in income trusts that year. But the name Jim Flaherty – the then-Canadian Finance Minister – still sends shivers down many shareholders’ spines.

On the last day of the month, he announced plans to tax all income trusts in a similar manner as corporations, at a rate over 30% on taxable income. Income trusts had been a popular investment vehicle in the preceding years, and as a result of the Finance Minister’s Halloween decision, investors, particularly in the Canadian energy sector, lost $35 billion almost overnight. Hence the media’s exaggerated (but perhaps contextually accurate) labeling of the decision as a ‘massacre’.

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