This is not dissimilar to investing new money into equities in late April when the ‘sell in May ….’ adage comes to the fore. There is no logic, rhyme or reason to this seasonal behaviour but because so many investors follow it, we often see market weakness purely because the buyers stand back and negative news is not counteracted in a balanced way. Why invest in late April when statistically a weak opportunity could present itself sometime in May? The same goes for September. In terms of numbers, the FTSE 100 finished October down by 1.2 per cent, but on 16 October it had fallen by 6.4 per cent. A return of 5.7 per cent in three and a half weeks was to be had for the canny investor, as we called at the time.
Performance of indices since start of September
Source: FE Analytics
In the US, the opportunity was even greater, as it tends to be a more volatile market than the UK with more growth sectors, such as technology. The S&P 500 finished the month up 2.3 per cent having also been down by 5.6 per cent in mid-October, giving a short-term return of 8.4 per cent for a US investor.
So where do we go from here? Prior to October, many of the bears were saying that we needed a correction, having not seen one for over two years, and that statistically it was overdue. We are not great advocates of chartist analysis but it does tend to have greater influence when markets are feeling tired, trending sideways and somewhat rudderless.
The maximum loss that an investor would have suffered from the highest point to the lowest during September and October is 9.9 per cent for a UK investor and 7.4 per cent for the US – not technically quite a correction (more than 10 per cent) but certainly the largest fall we have seen in the UK since May 2013. In the US, comparative falls were last seen in October 2012 and May 2011 – note the months where this has been happening.
The bears can still say that a correction has not happened but the bulls can say: “Well that was fairly significant.” It is now behind us and we can now get back to the fundamentals which generally from the US (and UK) perspective look to be robust. The UK will have underperformed due to the drag of a deteriorating Europe, which was the catalyst for the correction, and we await further action from the central bankers before discounting that concern.
Friday’s employment data from the US slightly missed the forecasts but the previous two sets of numbers were upgraded, showing a robust progression of their recovery. Many of those new jobs were lower paid, which has been a disappointing and unexplained feature of the US and UK employment recovery. Perhaps the ‘great recession’ has forced companies to remove expensive, experienced, older staff and then replace them with younger, well-educated, highly IT literate, but significantly cheaper workers, which are in abundance, thereby keeping costs down and boosting profits. It is somewhat of a mystery at the moment, leading to lower government income tax receipts and static average wage growth.
Either way, equities remain the most attractive asset class so long as the US economic machine continues its recovery. Interest rate rises look further away than they did and the third quarter US results season has delivered the usual 70 per cent plus of forecast beating announcements.
The October market setback and the US recovery does feel rather synthetic, as we all know that without QE, the economic world would be in a very different place. For now, with October behind us and the year-end approaching, perhaps that festive seasonal rally will also become self-fulfilling as investors ensure they are fully invested and are therefore very reluctant to sell.
Guy Stephens is a director at Rowan Dartington Signature. The views expressed are his own.
