October can be a tricky month for investors. The Great Wall Street Crash of 1929 took place in October. Black Monday, the day that the UK market lost more than 20% of its value in a single day, was October 19th 1987 and the week that followed saw equity values shredded. Arguably the worst bear market in living memory saw its most dramatic falls in October. I should know. I was there.
A look back to the 70s
In 1974 I had a full eleven years’ experience in the world of stocks and shares. Fuelled by the Yom Kippur war in the Middle East, a quadrupling in the price of oil, the miners’ strike, the three day week and the secondary banking crisis, our own stock market shed more than 70% of its value in little more than two years. The autumn of 1974 saw the end game in this most damaging of sell-offs, with many fearing that major City institutions were going bust. The nadir was reached on the first business day of the New Year.
As it happened, the Financial Times Industrial Average – our benchmark index of the day – rose by 150% during the first quarter of 1975. Capitalism survived, though the price paid for economic mismanagement was high. Inflation was rampant, reaching an annual rate of 25% at one stage. Government bond yields approached 20%. And Chancellor of the Exchequer Denis Healey had to go cap in hand to the International Monetary Fund to request a bail-out for Britain. The mid 1970s were tough indeed.
Buy on weakness, sell on strength?
Should I be drawing comparisons with the conditions that exist today? Probably not, though a sage old investor – the late lamented Sir John Templeton – once remarked that you should never believe the pundit who tells you this time is different. In truth, markets do repeat patterns that lead us to believe that we should have seen the next correction coming. Life isn’t like that, of course, and investors and their advisers should never lose sight of the fact that markets are at their highest when buyers are at their most confident.
The opposite is true, but buying when the world and his wife is selling takes courage, just as bailing out when buyers outnumber sellers by a margin is a hard call to make. Often the turn comes when an event takes place that is not necessarily an obvious indication that the mood should change. In January 1975 it was the collapse of an oil company that signalled the bottom of the worst bear market known to investors. But the result was to trigger a recovery.
Times have changed
There are differences today, though. In 1987 the influence of the derivatives market was crucial in speeding the collapse of share values. Today circuit breakers are in place to ensure such a panic driven, one way market cannot develop again. In 1974, private investors were still a large component in a lightly regulated market, while information tended to trickle down, rather than arrive in nano seconds on your smart phone as happens today. Tighter regulation and the predominance of the professional investor ensure news is reacted to with extreme dispatch.
The scion of the great House of Rothshild, Nathan Rothshild, is famous for ascribing his great wealth to selling too early. Long term investors, like Warren Buffett, will doubtless be prepared to sit out periods of potential uncertainty, such as those which undoubtedly exist today, by concentrating on value and quality. Shorter term managers, such as those subject to the scrutiny of the monthly performance tables, already seem to be taking a more defensive stance in their portfolios. I can’t blame them. Markets are high and valuation levels stretched. While the prospects for a return to robust global economic growth appear to be improving, you have to ask yourself how much further shares can progress.
Investor confidence, if damaged, can evaporate unsettlingly quickly. It could well be a geo-political incident that provides the trigger. There are plenty around. North Korea and the Middle East are areas that could ignite even greater concern than they do at present. Or they could calm down – my wish, certainly, and one which would have a potentially beneficial effect on sentiment. Not sure I’d bet the farm on such an outcome, though.
So my stance remains cautious, with the proviso that there is still a lot of money around to support financial asset values, that greater economic co-operation lessens the chance of a financial upset (though doesn’t eradicate it) and that Trump could either triumph or be dumped – either option likely to provide a boost to confidence. Investment is never straightforward, but I must confess to finding the current scenario as hard to read as any I have encountered in more than half a century. Stay nimble my investing friends.