UK equity markets have got off to a volatile start this month, with the FTSE 100 index having fallen about 2.3% since the start of October. For many investors, it has brought to mind this time last year, when most global markets experienced a correction that lasted until the end of December. Indeed, in October 2018, the FTSE 100 was down by 4.13%.
Whenever markets decline considerably in a matter of weeks, analysts tend to sift through the debris searching for reasons. One point of discussion usually centres around the presence of calendar anomalies in equity markets, such as the ‘October effect’. Many investors in the UK and around the world believe that October is hardly ever a strong time for shares and use this term to describe the phenomenon of market declines or even crashes at the start of the last quarter of the year.
Do bears usually win in October?
To date, there have been several notable October declines in the markets.
Major historical declines or indeed crashes that support the belief in the October effect include the Panic of 1907, Black Monday (1929) and Black Monday (1987).
Following a frenzied trading day, the crash of 19 October 1987 resulted in the Dow Jones Industrial Average (DJIA) dropping 22.6% in a single day.
In October 1987, the FTSE 100 fell by more than 20% over the course of a few days. However, in the year running up to October 1987, the mood had been one of euphoria as the FTSE 100 returned about 49% to investors.
Markets were down in October 2018
Although each country has its own stock market dynamics, many studies have shown that there is a high degree of interdependence between global markets. Thus major declines usually spill over to stocks in other countries too.
In 2018, several reasons might have given investors reason for pause in October — starting with the fact that the era of historically low interest rates, especially in the US, would be finally coming to an end.
Stocks tend to outperform other asset classes in low-interest environments. Also US households are currently over-extended as far as consumer debt levels are concerned and thus quite vulnerable to a rising interest rate environment.
In the UK, we had the effects of Brexit negotiations on not only the stock market, but also the pound, housing prices, and investor sentiment.
How about October 2019?
Many of our readers may still remember the financial crisis of 2008/09. Back then, the stock market crash of 2008 had occurred on 29 September. By early March 2009, markets had dropped over 50%.
Now, after nearly a decade and one of the longest bull markets in history, investors may fear that the bears may once again come out. They cite the US-China trade wars, inverted yield curve in the US, and yes, Brexit.
No one truly knows what direction the economy or shares will take in the future. And humans are mostly driven by the basic emotions of greed and fear. So there is a good chance that another market decline is likely to occur in the coming weeks or months. We just do not know when.
At The Motley Fool, we believe in saving and investing for the long term. Having a disciplined focus as well as a diversified portfolio that also includes dividend-paying shares could help investors to patiently get through the ebbs and flows of the market.
