OCTOBER often highlights the transitional role autumn plays as we progress from summer to winter and we need look no further than the recent heavy rains to see what happens when warm and cold air battle for supremacy.
A similar battle ensues in markets, between the emergence of value and the ongoing threat of global debt.
However, I noted a few weeks ago that this conflict had becalmed investment markets, squeezing indices in to an ever-decreasing trading range. The proviso however, was the veiled threat that when this pattern breaks down, a sudden burst of energy is likely to occur.
Like the weather, are October’s difficult-to-predict weather patterns an augur for investment markets?
The question is particularly acute for investors whose investing memories stretch back as far as the 1980s. October 19, this year, marks the 25th anniversary of the infamous 1987 stock market crash; the 19th being a Monday and a day when the FTSE 100 fell about 11 per cent. October 20 saw a fall of 12 per cent, a strong recovery followed on the Wednesday, though Thursday saw another precipitous fall before the market storm blew itself out by the time the week closed.
What many will also remember from that time is the previous Friday’s great storm, the worst weather southern England had seen for 284 years. Sevenoaks was reduced to one and stock market trading on the Friday was almost non-existent. The role this storm played in the following week’s events is hard to define, though for those investing and working through that period, the two are forever intrinsically linked.
For those who like numbers, the FTSE fell from a peak of 2400 in 1987 and hit bottom in December 1987 at about 1500. Prior to the crash, the market had risen 50 per cent since the start of 1986 and the crash effectively wiped out all the gains achieved in the previous 18 months. It took two years before markets returned close to their previous peaks and a further two years before it properly established itself above the previous highs. Conversely, those investing in late 1987 have now seen a return approaching 400 per cent, though there has been plenty of excitement along the way.
The Wall Street crash of 1929 occurred in October and I recall October 1989 feeling like a wobble for old time’s sake and, since then, for some of us, October will always be synonymous with nervous markets. But does this October effect hold any water?
My colleague and chief strategist, Mike Lenhoff, recently commented that it is a while, until now, that much reference was made to the October effect. However, Bloomberg recently commented that October marks the third anniversary of the (eurozone) debt crisis, though when it started is anyone’s guess, and the eurozone continues to outlive all expectations of its demise, at least for now.
My colleague’s analysis suggests that removing 1987 from the equation undermines its mythical stance and the month holds no greater threat than any other. Yet anecdotally the effect lives on, perhaps becoming the Mark Twain effect, who noted that October is one of the peculiarly dangerous months to invest in stocks, other dangerous months being July, January, September, April, November and so on.