Boo! October effect spooks markets again
Happy Halloween. Are you feeling spooked yet? Sharemarket investors certainly are.
Global markets have fallen sharply in the past few weeks. The NZX-50 is off nearly 10 per cent since its peak in late September.
So far the fallout has been contained — we haven’t seen it spilling over to the wider economy — although the slump is likely to put a dent in your KiwiSaver returns this quarter.
So what’s happened? Actually, nothing specific.
October is a spooky time in the Northern hemisphere. The days are getting shorter, there’s a chill in the air. Falling leaves remind people of their mortality and festivals like Halloween are held to ward off evil spirits.
And of course it’s famously when markets crash.
It’s been dubbed the October effect — or sometimes the Halloween indicator — and it appears to have reared its ugly head again.
The official causes for the sell-off are the same concerns markets have had for a year or so now.
US interest rates are on the rise, there are trade tensions weighing on global growth and ongoing debt crises going on in various countries around the world.
There was a mild panic and selloff in February but shares bounced back and rose steadily despite all those worries.
That has prompted a barrage of commentary and opinion pieces warning that we were due a crash.
Many fund managers have already moved to more defensive positions and some are now calling this slump most widely predicted sell-off ever. Why now though?
I’m not superstitious but I think there might be something to this October effect.
Human behaviour has a habit of following patterns — although sceptics would point out that humans also have a habit of seeing patterns and ascribing meaning to them.
The science is debatable but stock markets slumps at this time of year do seem unnervingly frequent. And it is Halloween.
Take a look at the Wikipedia’s list of memorable stock market crashes.
There’s the two big ones of course: Black Tuesday, October 24 1929 and Black Monday, October 19 1987.
Then there’s the GFC of 2008. While the big event we generally remember is the collapse of Lehman Brothers on September 15 — the big market falls happened in October.
In the week starting October 6 the Dow Jones Index closed lower every day for a cumulative loss of 18 per cent, its worst weekly decline ever on both a points and percentage basis. The S&P 500 fell more than 20 per cent.
In terms of single-day falls, October 24 was the worst of the crisis, with many of the world’s stock exchanges experiencing their biggest ever falls, and drops of around 10 per cent in most indices.
There’s also a whole bunch of lesser known slumps and panics that happened in October.
The “Black Friday” crash on October 13 1989 saw both the Dow Jones and S&P Indexes fall more than 6 per cent after the collapse of big deal to buyout United Airlines.
The Asian Financial crisis of 1997 started in July but peaked with a crash on October 27 which saw markets fall more than 7 per cent.
“The Panic of 1907” (sometimes called the “Knickerbocker Crisis” for reasons I can’t fathom) was a big one involving Theodore Roosevelt, JPMorgan and resulting in the founding of the Federal Reserve system. And yep, that was October too.
Of course there are plenty of other events at other times.
And even if the prevalence of historic slumps in October is too obvious to ignore you could argue that it puts undue emphasis on dramatic single-day or week-long falls.
The academics and many of the smartest investors — like Warren Buffett — would be quick to point out that it’s the cumulative effect of the boring days in between — the ones that don’t get remembered in the
I’m not superstitious but I think there might be something to this.
history books — that create real wealth.
But that doesn’t change the fact that it’s October and markets are spooked again.
Hopefully things calm down and we can notch this up as a healthy rebalancing and repricing.
Despite US President Donald Trump’s desire to see the bull market run ever higher, a series of moderate falls and slowing of growth should hopefully spare us a deeper crisis which spills to the wider economy.
Last week Trump blasted US Federal Reserve chair Jerome Powell, blaming him for the October slump and complaining that Barack Obama had it easier with lower rates.
Putting aside the fact that Trump appointed Powell, and even that he makes no allowance for the financial crisis Obama inherited, the comments were either deeply disingenuous or suggest he really has no grasp of monetary policy.
Trump seems to believe that you can just leave rates low and let the economy power on indefinitely fuelled by cheap credit.
He is unwilling or unable to see that low rates caused a debt run up that led to the 2008 crisis.
He has no fear of debt, as proved by his fiscal policy which has quickly blown the US Government deficit back out US$1 trillion a year.
That’s really spooky stuff.