October is often called “Shocktober.” Why might the market be in for another rough month this time around?

The stock market is likely to post below-average returns in October, according to Barron's, citing a new study. The study states that to understand how the market will perform in October, one need only look at its performance in August.

In the months that mark the start of a new calendar quarter, the market typically moves in the opposite direction of the trend seen in the second month of the previous quarter, according to the study “Correlation Neglect in Asset Prices,” published in September. Its authors are Jessica Wachter, a professor at the Wharton School who headed the SEC’s Office of Economic and Risk Analysis from 2021 to 2025, and Gonyeh Go, a professor at the University of Hong Kong. They argue that investors and researchers have largely ignored the persistent correlations—both positive and inverse—between returns in different months within the quarterly reporting cycle.

Here’s how the mechanism described in the study works. In the first month of the quarter, a significant number of large companies from various industries report their earnings. Their results provide a fairly comprehensive picture of the state of the economy, to which the market reacts with a rise or a fall. In the second month of the quarter, earnings reports are released less frequently and contain little fundamentally new information. If the figures were strong in the first month, they usually remain strong in the second, and vice versa.

Since investors are unaware of this correlation, they tend to overestimate the significance of the second month and further push the market in the same direction it was already moving, economists write. This excessive movement is corrected in the first month of the following quarter, when a new set of macroeconomic signals becomes available. The authors of the study concluded that the market’s direction in the second month of the quarter is highly likely to match the trend of the previous month, while in the first month of the following quarter, it will be the opposite.

In August 2026—the second month of the third quarter—the S&P 500 index rose 2.6%, compared with a historical average of 0.7% per month over the past 100 years. According to the study’s logic, this is precisely what increases the likelihood of a pullback in October, Barron’s concludes.

It is not advisable to interpret this pattern as a signal to abruptly sell off stocks and move entirely into cash or short positions, since monthly market returns contain significant statistical noise, Vochtner clarified in an interview with the publication. In her view, it is wiser to gradually increase or decrease the proportion of stocks in a portfolio each month based on the model’s signals. Low-cost exchange-traded funds (ETFs) tracking the S&P 500 index make it easy to do so at minimal cost.

For example, with a target equity allocation of 60% in the portfolio, an investor who observed stronger returns from the S&P 500 in the first month of the quarter could increase the equity allocation in the second month — say, to 70–80%, depending on their risk tolerance. Moreover, the higher the first month’s returns, the greater the increase in the equity allocation. In the third month of the quarter, when earnings reports are practically nonexistent, the allocation is returned to the target level, and in the first month of the following quarter, it is symmetrically reduced below the baseline 60%. If the first month were weak, the actions would be reversed.

According to tests conducted by Watchter and Go, this approach significantly outperformed 19 other well-known and widely used market-timing strategies. Wachter notes that past performance is no guarantee of future returns, but believes that investors would be wise to take into account the market’s predictable reaction to the earnings cycle.

October’s poor reputation in the collective consciousness of investors stems from the fact that it was during this month that two of the largest market crashes in U.S. history occurred—“Black Thursday” in 1929 and “Black Monday” 1987. The fact that these events coincided with October can almost certainly be considered a statistical coincidence. Nevertheless, it has given rise to persistent investor fears about this month, which is sometimes referred to as “Shocktober,” notes Barron’s.

This article was AI-translated and verified by a human editor