The October Effect is a market anomaly initially observed in the stock market which suggests stocks tend to decline during the month of October. While some refer to the effect as a "spook," the October Effect is more likely perceived than an actual phenomenon.

The concept of the October Effect is believed to have originated as early as 1984 in a paper on stock market returns and anomalies by economist Robert J. Shiller, who is known for his work on behavioral finance and market volatility. The idea of the October Effect is that the fall season tends to bring increased institutional selling and investor doubt. Investors may become more cautious during the month of October, leading to an overall decrease in stock prices.

The idea behind the October Effect is that the traditional beginning of the holiday season, particularly Halloween, causes investors to worry about their financial situation as Christmas approaches. In addition to this psychological motivation, special tax considerations have been suggested as another factor in the October Effect. The investor may attempt to reduce stock losses in October to offset potential gains in November and December.

Despite the October Effect being observed for some time, numerous studies have been conducted and have concluded that there is no statistical evidence for an October Effect exists. These results have suggested that the phenomenon, much like other calendar anomalies, have been largely alleviated thanks to the proliferation of computerized trading and more sophisticated, year-round investing strategies which protect against seasonal as well as other market events.

In fact, over the past century and more, October has tended to be a net positive month when it comes to stock market returns. Recent statistics show that, since 1950, the average return during the month of October has been 1.82%, significantly higher than the typical return of around 1%.

Therefore, while the October Effect may have been pronounced in the past, it likely appears now to be nothing more than a market anomaly. While it is important for investors to remain aware of seasonal trends and events, the psychological expectation of the October Effect appears to have been largely dissipated in recent decades.