Markets overcome the ‘October effect’
2-11-2021
George Lucas, Raiz Group CEO
In investment circles, October gets a bad rap. Three past tumultuous market events – the Bank Panic of 1907, the 1929 stock market crash and Black Monday in 1987 – all occurred in October. Consequently, the “October effect” traditionally has investors nervy, anxiously awaiting the calmer waters of November.
Well, this year their fears came to naught, especially in the US. Wall Street stocks enjoyed their best monthly performance for the year with both the S&P and Nasdaq indexes gaining about six per cent each.
This positive outcome was despite disappointing results from two of the tech giants (Apple and Amazon), renewed questions about labour shortages, supply lines being squeezed and, consequently, persistently higher inflation. None of these factors, nor the “October effect”, deterred investors.
In Australia, the market was far more subdued, with the S&P/ASX200 index flat in October. Where investors in the US were seizing on any positives, we were more consumed by the negatives, especially China. Our largest trading partner continues to spook investors with its own economic performance (think energy) and its continuing hard-line approach to the bilateral relationship.
China’s envoy to Australia – one of the new breed of “wolf warriors” might have left Canberra – but no one is suggesting this signifies an easing in tensions. Our market also suffers from a lack of large tech companies that have been responsible for the much of the stock market growth globally.
Inflation on the move
The Reserve Bank of Australia (RBA), US Federal Reserve and the Bank of England will announce their interest rate decisions this week; today in Australia (the November decision always coincides with the Melbourne Cup) on Wednesday in the US and Thursday in the UK. The Reserve Bank has indicated the 0.10% cash rate will not change this calendar year, and it would be at longer odds than the rank outsider in today’s Cup to change direction.
What was noteworthy was the RBA’s decision not to defend its bond-yield target, which is central to its quantitative easing program. This decision pushed the yield on Australia’s April 2024 government bond to more than 0.7 per cent — well beyond the bank’s target of about 0.1 per cent.
The decline in headline inflation in Australia in the third quarter (July-September) was entirely driven by technical factors on the way the index is calculated. Underlying inflation rose into the RBA’s target band for the first time in seven years, inevitably putting pressure on the Bank to keep reducing its monetary stimulus in the months ahead.
In the US, I expect that the Fed’s policy statement next week may signal rising concerns about inflation and announce the beginning of asset purchase tapering. Inflation concerns are rising globally.
Economic recovery slowing
The slowdown in US GDP growth to only 2.0% annualised in the third quarter was partly due to fading fiscal stimulus and the hit services spending took from the Delta strain in the US. But the biggest factor appears to be supply shortages in the US, particularly motor vehicles, where a plunge in car sales caused consumption growth to drop to only 1.6%.
This is not just a US phenomenon. Indeed, we need to become accustomed to supply shortages as they can limit the amount of personal consumption that can occur. In Australia, for example, where there are also supply issues, the recent retails sales number did not encourage the view that consumption is picking up. The flip side, of course, is increased savings in the economy, but right now we need consumers spending.
The recent 2.2% quarter-by-quarter increase in Euro-zone GDP for the third quarter means that the region’s recovery to its pre-virus level is now largely complete. The boost from re-opening is now over in Europe.
Malaysia expected to hold rates
This week, we expect Malaysia’s central bank to keep its policy rate on hold to support the economic recovery, while Indonesia’s third quarter GDP data is likely to show a contraction in output, which I think will be short-lived.
I don’t expect the price of gold to continue to rebound and it will probably fall further from the current prices of $1,800/oz.
Gold pays no real rate of interest. Therefore, its price tends to fluctuate depending on the opportunity cost of holding the metal. With the US stock market near a record high, gold as a safe haven asset will not drive demand.
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