Many stock market folk are superstitious, never more so than in September and October, traditionally the worst two months to invest in the British market.
According to The UK Stock Market Almanac, the reference guide that tracks historical market performance, the FTSE All-Share index has delivered an average monthly return of -1.1 per cent in September since 1982. The market has actually risen in half of all Septembers in that period, but when it has fallen, it has fallen badly. Since 2000, the index has tumbled by more than 8 per cent on three occasions.
Yet October is the month that really spooks superstitious types. Since 1984, seven of the ten biggest one-day falls in the UK market have been in October, including Black Monday on October 19, 1987, and Bloody Friday on October 24, 2008, when, at the height of credit crunch fears, stock indices around the world generally fell by about 10 per cent each. Of course, October was also the month in which the 1929 Wall Street Crash heralded the Great Depression and in which the Asian Crisis of 1997 took hold.
In recent years, though, October has not been as gruesome as that list would suggest, with the UK market falling in only five Octobers since 1982. This year, September has so far failed to deliver unpleasant surprises. With five trading days left, The FTSE All-Share is ahead by more than 1 per cent this month.
So what of October? On fundamental grounds, there are few reasons why markets should continue rising. In the United States, the S&P 500 trades on a price/earnings ratio of more than 18 times, compared with an average of 16 for the past ten years. In the UK, the FTSE 100 trades on a P/E ratio of more than 19 times, compared with a historical average of 14. Equity markets in other developed economies are similarly stretched. Moreover, markets have been rising for a long time. The S&P 500 and the FTSE All-Share began their present bull run in March 2009, since when they have risen by 218 per cent and 109 per cent, respectively.
Strikingly, on August 11, all three main American stock indices, the S&P, the Dow Jones industrial average and the Nasdaq, simultaneously hit record closing highs. The previous time that happened was on the final trading day of 1999, after which the dotcom bubble burst, ushering in three grim years for stock markets.
There are also many geopolitical reasons why a nervous investor might want to take profits or avoid committing new money: the growing chance of a Trump presidential election victory and ensuing protectionism; the British government’s inability to articulate what the UK’s relationship with the European Union will be like post-Brexit; China’s unsustainable credit bubble and the nascent “shadow banking” system there; elections in Germany, France and the Netherlands early next year, with the far right on the rise in each; a potential Italian constitutional crisis this autumn; continuing instability in Turkey; and Syria still in flames. And that is not even mentioning the fact that Russia has been in recession for nearly two years, tempting President Putin into aggressive policies abroad to distract from falling real incomes at home.
Crucially, corporate profitability has been stagnating in many sectors. In the S&P 500, earnings growth has slipped in key sectors such as energy, telecoms, finance and real estate, with only technology and consumer goods holding up. In the UK, all the big traditional cash generators on which investors have relied for the past ten to fifteen years, notably oil, mining and banking stocks, have seen their profitability hit by various factors of late. In their place, as Patrick Hosking noted in these pages last week, investors have come to rely on consumer goods companies, whose own ability to create returns has come not from higher profits but from debt-fuelled share buybacks.
In relation to bonds, whose valuations everywhere have been puffed up by asset purchases by central banks, equities still look to be of reasonable value. For example, in Europe, the difference between yields on equities, as measured by the MSCI index, and yields on government bonds is more than 350 basis points at present. Many professional investors have concluded that, although stocks look expensive when measured by their P/E ratios, their yields still make them attractive.
The problem is that this anomaly is entirely attributable to quantitative easing. So, in the absence of any rise in corporate earnings growth, this bull run can really be expected to last only as long as central banks continue their asset purchases. It’s all about when the free money runs out. The Bank of Japan and the European Central Bank are keeping the show on the road for now, yet, from Mark Carney’s recent comments, he clearly believes that the Bank of England is nearing the limits of monetary policy. The US Federal Reserve, meanwhile, is set to raise rates again in December.
There is an argument for saying that you should never try to time the market. It emerged last week that Terry Smith, one of this country’s greatest investors, has more than doubled his holding in his Fundsmith Equity Fund, taking it to £200 million. His is a buy-and-hold strategy.
However, for those who do worry about market-timing, there is an uneasy sense that the longer this bull run goes on, the nastier the ultimate reckoning will be.