Wall Street is no stranger to the eerie phenomenon known as the "October Effect." The market’s recent plunge has reignited concerns, and investors are once again grappling with the unsettling history of October market volatility.

The Dow Jones shed 454 points, or 1.3%, on Oct. 3, marking its most substantial decline since March and pushing it into negative territory for the year.

Meanwhile, CNN's Fear & Greed Index—which closely tracks seven crucial market indicators to gauge investors' sentiment—is in "Extreme Fear" territory.

How much of this recent volatility can be attributed to seasonality is subject to debate, but one thing is sure: investors have plenty to worry about this month.

Is the "October Effect" really driving markets?

The “October Effect” is a historical pattern that suggests stock market declines tend to occur during October. Proponents of this theory suggest that it's due to seasonal factors at play in October.

"Historically, investors have been fearful of the stock market’s returns in October, likely because of the crashes of 1929 and 1987," said Sam Stovall, chief investment strategist at CFRA Research.

While statistical evidence doesn't conclusively support this phenomenon, the superstition surrounding it can, at times, manifest as a self-fulfilling prophecy.

"The popular notion is that performance of stocks in October is lackluster," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. "However, over the past 20 years, from 2003 through 2022, the S&P 500 has posted gains 65% of the time."

According to Sandven, during this period, October boasts an average S&P 500 return of 1.4%, surpassing the average return of all months except three.

This illustrates that volatility in October isn't always negative.

Although October witnessed two of the worst months in U.S. stock market history in 1929 and 1987, Sandven's data reveals that the month statistically ends on the upswing.

Nevertheless, the memory of the Great Recession—when markets experienced a massive selloff in October—may still have a psychological effect on certain investors, especially in the current environment of rising interest rates.

But seasonality isn’t the only concern for investors this October.

Rising bond yields and corporate debt sales

One of the key drivers of anxiety in the current stock market is a surge in corporate debt sales and the subsequent rise in bond yields.

Rising yields make safer assets, like bonds, increasingly attractive to investors, potentially diverting capital away from stocks.

“Rising bond yields mean that stocks have more competition," said Jeff Corey, senior vice president of Boston-based wealth management firm Claro Advisors. "If an investor can earn almost 5% yield in a safe government bond, it may not make as much sense to invest in stocks, which are much more volatile and risky than bonds.”

Furthermore, robust job data has stoked concerns that the Fed may opt to keep interest rates higher for longer.

A prolonged period of high interest rates can increase the cost of debt for companies and erode corporate profitability, according to U.K.-based wealth manager RBC Brewin Dolphin.

Government dysfunction and fiscal uncertainty

The chaos in Congress is adding an extra layer of unpredictability to the markets.

Although Congress narrowly avoided a government shutdown in September, political discord reached a boiling point when, just a few days later, House Republicans moved to oust Speaker Kevin McCarthy.

It was the first time in U.S. history that a House speaker was forcefully removed through a lawmaker revolt.

Ironically, the removal of McCarthy has raised the risk of a longer government shutdown next month when Congress runs out of temporary funding.

Rating agency Moody's has even cautioned that a government shutdown could be “credit negative” for the U.S. Prolonged political discord could potentially trigger a credit downgrade.

Markets didn’t respond favorably when Fitch, another major rating agency, downgraded the U.S.’s long-term credit rating in August.

Although most analysts shrugged off the market decline as temporary, veteran investor and founding partner of Mobius Capital Partners Mark Mobius says another downgrade could be harmful to U.S. bonds and the dollar.

“I think, from a longer-term perspective, people are going to begin to think that they’ve got to diversify their holdings, first away from the U.S. and also into equities because that’s a way to protect them from any deterioration of the currency—the U.S. dollar or for that matter any other currency,” he said.