What is the Calendar Effect?

A calendar effect is a theory that stock prices will perform differently at different times of the year.

How Does the Calendar Effect Work?

There are many different calendar effects, including the Monday effect, 'Sell in May and Go Away,' and the October effect. For example, investors create a self-fulfilling prophecy regarding an October Effect by being fearful that because the crashes of 1929 and 1987 both occurred in October, the month is somehow forever tainted. If more and more investors believe the October Effect exists, they sell their shares early in October, thereby depressing prices and creating the very effect they intended to avoid.

Why Does the Calendar Effect Matter?

The calendar effect is just one of many superstitions that distract investors from doing fundamental and technical analysis of their existing and potential investments. Once in a while, some evidence of one of these effects surfaces, but generally there is no real correlation between month and performance.