Brace for Wall St October wobbly

Blame global warming if you like but October has had more sharemarket crashes than any other month.

Glanced at the calendar lately?

Eight of the 20 biggest one-day falls have been in October, which suggests more than bad luck. It means it's nearly four times more likely to misbehave than its associates. Call it attention-seeking - though, to be fair, in most years October is one of the better months. Plus, the global financial crisis-inspired crash, the second worst ever, started a solid month later.

September is more consistently troublesome, so thank goodness it's short a day. Mind you, this doesn't feel like a bubble, which is a prerequisite for a correction. Trouble is, it never does because bubbles are only obvious in retrospect.

Did you know the sharemarket recently surpassed its high point of November 2007? Can't say I'd noticed either. But CommSec's Craig James insists "in the space of just 4½ years, returns on Aussie shares have doubled".

Well, strike me down. Thank dividends, which have soared over the past five years. To be more exact, they dropped or disappeared altogether for a time but have bounced back higher than before.

They've made up for some of the slack in values, though even then prices have jumped 20 per cent just in the past year.

There's a lesson in this, by the way. The worst thing you can do in a market freefall is flee to cash, because you'll miss the best part of the rebound, which is always the first few days. And rebounds are always bigger than crashes.

There's no escaping our market is pricey. The price earnings ratio (p/e), a measure of how long it takes to get your money back - the lower it is, the cheaper the market - is hovering around 17, where it was in the heady days of 2007 no less, according to IG analyst Evan Lucas.

Based on analysts' profit projections, the p/e ratio for next year, using current values, is a more modest 15; but here's the crunch. To reconcile the two, either analysts are being overly optimistic about next year's profits, or the market has run ahead of itself.

Either way, it doesn't bear thinking about. Nor should it be forgotten that when push comes to shove, Wall Street has the upper hand in this globalised market. It's already breached its pre-GFC record, even before counting dividends.

Good for it, especially considering it's done this with far weaker economic growth than we've had. Only that's the problem. Markets have been artificially buoyed by the US Federal Reserve's money-printing, done mostly by buying back government bonds known as quantitative easing or QE.

In reality, this sugar-hit of cheap money and a weak currency is behind Wall Street's surge. Naturally, every time it thinks the lolly jar is going to be confiscated, it throws a tantrum. And the Fed's fingers are creeping closer. Chairman Ben Bernanke says tapering, as he calls the winding down of QE, "could begin later this year". It probably won't, because first the unemployment rate has to drop below 6.5 per cent - three months to drop from 7.3 per cent.

Besides, there's a snag. Whenever tapering is mentioned, bonds are dumped.Rising bond yields have lurked behind every sharemarket rout whether in October or not. And wouldn't you know it? This month the US hits its Congress-mandated debt ceiling, the perfect excuse for another October wobbly.

Twitter@moneypotts