Forest Gump, Chocolate Boxes and Stock Markets
At the beginning of last month you could have been forgiven for thinking that the world was going to end. Markets had just ended their worst quarter in 3 years, with the MSCI World Index falling 18% over the 3 months, although the fact that this was the worst fall in only 3 years shows just how bad the markets were back in 2008/2009.
Europe was a mess and they were talking about a new recession in the U.S., a standard measure of 'fear', the Chicago Volatility Index, was at 48 in August which was a new 2 year high.
Many of the experts and pundits were calling for people to get out of the market and move into cash and this sentiment was shared by many clients I spoke to who also had the same concerns, although for the most part, many took our advice of staying invested. Whilst I am not here to say I told you so, I did post on this very subject in early October after markets began their climb back from the previous quarter's malaise. As it turned out October ended up being the best month in 20 years on Wall Street, this despite the 200 point fall on the last day of trading with the benchmark S&P 500 index up nearly 11% for the month, its best monthly percentage gain since December 1991.
It’s funny how things can change so quickly. One of the advisers in the office told me late last month that I should write about the 'October Effect' in one of my posts. I started doing a little research on this and discovered that October is not actually the worst month in historical terms and there is no real basis for the belief that October is a bad month on the markets. In fact from 1930 to 2004 September was the worst performing month with an average loss of 1.28% compared to October which had a positive return of 0.28% over the same period. Of course the collective belief in the October Effect probably comes from the fact that the 1929 and 1987 crashed both occurred in October, and whilst the collapse of Lehman and the AIG bailout happened in September, the market really started to accelerate falls in October of 2008. The expectation of a continued decline was well entrenched in collective psyche.Continued on the next page