Beware, October is upon us! Not only is it the most volatile month for share mar-kets swings, but it was also the month when the two greatest stock market crashes took place – the 1929 crash that launched the Great Depression and the Black Monday collapse in 1987.
Beware, October is upon us! Not only is it the most volatile month for share mar-kets swings, but it was also the month when the two greatest stock market crashes took place – the 1929 crash that launched the Great Depression and the Black Monday collapse in 1987.
Two mini crashes have also occurred in October: the All Ords’ 7.9 per cent drop in 1989 and its 18 per cent fall over four days in 1997, thanks to Asia’s woes.
October, of course, has also been a month of some solid rises. Ord Minnett, for ex-ample, has found that over the past 19 years, markets have been up 11 times or 58 per cent of the time in October.
Looking at the worst 20 months out of a sample of 234 months, Godfrey Pem-broke discovered that Octobers only appear twice (1987 and 1997), while Februaries appear four times. And, three of the best months in this sample were also Octobers.
Richard Coppleson, an associate director at Ord Minnett, says while October may not be the worst month for overall performance, it has, without a doubt, been the most violent for intra-month moves over the past 28 years.
He says the average intra-month move between the high and low in October is 7.45 per cent. If you include October 1987, the figure jumps to 9.32 per cent.
The second most violent month, he notes, is July at 7.04 per cent while the most docile is June with a swing of 4.7 per cent.
If past trends are anything to go by, the US market could be heading for a dive on Tuesday October 19, the same date it tumbled in 1997. This day comes 55 days after its record of 11,326 on August 25 this year.
The 1929 and 1987 crashes both happened exactly 55 days after the Dow peaked, Coppleson says.
Looking more closely at conditions just before the 1987 collapse, he notes some similarities.
The US dollar has fallen against a major currency (the Japanese yen), as happened then. International capital is also leaving the US market for growth markets in Ja-pan and Europe.
And, the US trade deficit is growing exponentially. Indeed, the final straw that broke the US market’s back in 1987 was the release of the US trade deficit figures in mid-October which were way above expectations, causing another sell off in the US dollar.
On historical comparisons, the US equity market is now overvalued and there is persistent nervousness over the direction of short term interest rates.
But Coppleson also points to a number of differences. While inflation was a real threat in 1987, it is only a perceived danger now even though there are some warning signals: higher oil and gold prices and an uptick in the commodity cycle.
In addition, he says technological advances have led to huge gains in productivity which have supported the continual growth in US corporate earnings, without fuel-ling inflation.
The US bond sell off has also not been as dramatic as it was 1987 and US earnings have so far been supporting the Dow’s gains.
Indeed, US companies are still viewed by many as fairly valued, while back in 1987 they were considered absurdly expensive by any rational measure.
However, Coppleson says one danger in the US market could be an early disap-pointment in the reporting season which kicks off in October.
Another is that Y2K concerns could lead to some sell off of stocks as US and Australian investors switch to the safe havens of cash or bonds.
“A fund manager would not want to take the chance of not cashing up in case there are any Y2K problems. That would be suicide,” Coppleson says.
“Trustees would always prefer an erring on the side of caution, especially given the potential scale of the possible problems.”
Another concern is a possible sell off in the Australian market ahead of Telstra 2.
Coppleson notes that shrinking trade volumes have made it almost impossible lately to sell any stock of size as institutions attempt to raise capital to buy into this and other IPOs.
“There was almost $30 billion worth of stock traded in July. This fell to $24.6 bil-lion in August and hit a low point for the year of $23.7 billion in September,” he says.
Given all the problems in the US market and with Y2K approaching, Coppleson expects crash fears to be omni-present during mid to late October.
“Technically, the market looks terrible right now and its breath is continually shrinking, the highs have been seen and it is more likely that we will give up the calendar year’s gains during October,” he says.
But he notes that a sell off, should one occur, would offer one of the most superb chance to stock pick in recent years.
“As the US guys have long claimed, October is the ‘Bear Killer’. It usually pro-vides a great buying opportunity,” he says.
