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BLOG:Does ‘the October effect’ really impact the markets?

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17/10/2012
As Mark Twain famously noted, “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September...
BLOG:Does ‘the October effect’ really impact the markets?

…April, November, May, March, June, December, August and February.”

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, is October’s difficult to predict and are weather patterns an augur for investment markets?

The question is particularly acute for investors whose memories stretch back to the 1980s. October 19th 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 around 11%. Tuesday 20th saw a fall of 12%, 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 drew to a close.

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 around 1500.

Prior to the crash the market had risen 50% 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 witnessed a total return approaching 400% though there has of course 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 statistical analysis suggests that removing 1987 from the equation; undermines its mythical stance and this month holds no greater threat to markets than any other month. Yet anecdotally the effect lives on, perhaps becoming the Mark Twain effect, who duly noted that October is one of the peculiarly dangerous months to invest in stocks, the other dangerous months being the remaining eleven.

 

John Pearson is a Divisional Director in the Teesside office of Brewin Dolphin

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