Brace for Wall St October wobbly
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.
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Frequently Asked Questions about this Article…
October has a long history of big one-day falls — the article notes eight of the 20 biggest one-day market drops occurred in October — which makes it a month associated with extra volatility. That history, plus calendar events like the US debt ceiling and investor reactions to policy shifts, helps explain why investors talk about 'October wobbles.'
The article warns that the worst thing you can do in a market freefall is flee to cash because you risk missing the best part of the rebound, which often happens in the first few days. For everyday investors, that suggests avoiding emotional, time-based selling and instead sticking to a plan or long-term strategy rather than trying to time an 'October' sell-off.
Yes — according to the article the market recently surpassed its November 2007 high. The recovery reflects both rising prices and a rebound in dividends, but the piece cautions that the market is pricey by some measures, so investors should be aware that valuations have moved up alongside the recovery.
A P/E of about 17, as mentioned in the article, means investors are paying roughly 17 times current earnings for shares — similar to 2007 levels. Using analysts' projected profits, the forward P/E drops to about 15, but the article points out that mismatch implies either analysts are optimistic about next year's profits or the market has run ahead of fundamentals.
The article highlights that dividends have rebounded strongly and helped double returns on Aussie shares over a recent 4½-year span. While higher dividends have made up some slack in values and boosted returns, investors should consider dividends as one part of total return (price growth plus income) rather than as a sole safety net.
The article explains QE as the Fed buying government bonds to inject cheap money into markets, which has helped buoy Wall Street. If the Fed starts 'tapering' (winding down QE), markets can react badly — bonds may be dumped, bond yields could rise, and equity volatility often follows when investors fear less monetary support.
Rising bond yields matter because they increase borrowing costs and make bonds more attractive relative to stocks, which can prompt investors to sell shares. The article notes that every sharemarket rout — October or otherwise — has had rising bond yields lurking behind it, so yield moves are closely watched by investors as a risk factor.
The article flags the US hitting its Congress-mandated debt ceiling as a timely risk that could spark another 'October wobble' — political or fiscal brinkmanship can unsettle markets. Everyday investors should watch headline risk around the debt ceiling and avoid knee-jerk moves, keeping an eye on cash needs and maintaining a diversified portfolio to manage short-term shocks.
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