An October Surprise? : Falling Stock Prices Prove Alluring, but There May Be a Hook
Wall Street’s legendary October curse struck again Monday, only to be dispatched by an army of investors who have become conditioned to buy into major market routs--especially at this point on the calendar.
The Dow Jones industrial average, which had spiraled to a 105-point loss early in the day, rallied sharply in the final hours of trading to close off just 21.61 points, at 3,179.00.
The raucous session provided the most powerful evidence yet of the imprint on investors’ psyches of frightening October declines in 1987, 1989 and 1990: In each case, investors who bought into those declines profited from higher stock prices in the following months.
But the eagerness of buyers Monday troubled some analysts, who said that belief in the fast rout/fast recovery market phenomenon may now be embraced by too many investors. Indeed, whenever Wall Street assumes that it has deciphered a market pattern, the pattern usually changes.
“For a long time now, people have bought on weakness, and they’ve been rewarded for that. But one of these days, they aren’t going to be rewarded,” warns Dan Sullivan, who publishes the Chartist market newsletter in Seal Beach.
Monday’s swoon began in Europe, where key markets plummeted on growing pessimism that still-high interest rates across the Continent are all but assuring a deep recession ahead.
U.S. investors, increasingly worried about the economy and the outcome of the presidential election, had pulled the Dow down 53.76 points Friday. With Europe adding more woes on Monday, sellers took control from the opening bell.
But by midday, buyers began to rush into the market in force, apparently responding to what they believed to be cheap prices. At its midday low of around 3,100, the Dow was off 5.2% from its close at the end of September.
Why buying should have begun at that point isn’t obvious, analysts note. What is clear is that many investors entered October poised to buy into what they fully expected would be a troubled market.
For reasons that Wall Streeters cannot fully explain, October has frequently been an awful month for the economy--and thus for stocks--going back to 1929. Pessimism and concern about the pace of economic growth, the direction of interest rates and the level of stock valuations reached peaks in Octobers of 1929, 1932, 1962, 1979, 1987 and 1989, among others.
Most recently, the bear market that began after Iraq’s invasion of Kuwait in the summer of 1990 ended in October of that year. The Dow plunged from 2,999.75 in July, 1990, to a low of 2,365.10 that October. Prices then began to inch higher, culminating in the birth of a new bull market with the start of the Gulf War in January, 1991.
Thus, while October is viewed by many as a terrible month to be in stocks, many analysts instead argue that October deserves the title of “bear killer”: When a market washout occurs in October, it has historically been time to buy.
The question Monday, however, was whether investors have jumped the gun. With the economy still deeply troubled and stock prices still at historical highs relative to earnings, there is concern that the market needs a far deeper pullback before it can legitimately be termed attractive again.
Some analysts don’t buy that. Yale Hirsch, an Old Tappan, N.J.-based investment newsletter writer and market historian, notes that many stocks have been in their own private bear markets since spring. The blue chip Dow, he says, is only now beginning to reflect the sharp declines in many smaller stocks.
So if investors see another “bear killer” in this October, they may be on track, Hirsch says: A Dow decline at this stage may simply be the last gasp of the bear, he says.
Though Wall Street has been concerned that a new recession in Europe could drag the United States into full-fledged recession as well--with devastating implications for stock prices--most economists believe that Europe is following our economy and our stock prices rather than leading them.
And no matter which presidential candidate wins the election, goes the bullish argument, his No. 1 priority in 1993 has to be spurring economic growth--which should be good for stocks.
Nonetheless, the Chartists’ Sullivan warns investors against betting the ranch that this October will be the glittering buying opportunity of Octobers past.
“This is a crucial point right now,” he says, noting that the market’s technical signs, such as the Dow’s pattern on charts, are ominous.
If Monday’s rally doesn’t follow through, and investors believe that they have been fooled into buying too early, Sullivan says, they could quickly turn on stocks and produce a horrendous decline.
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European Markets: From Bad to Worse
European stock markets, still reeling from the currency crisis in September, now face the prospect of further economic weakness even as interest rates stay high--a prescription for more selling, experts say. How key markets fared Monday:
London: The Financial Times 100 index plunged 103.40 points, or 4.1%, to 2,446.30, the biggest decline this year.
Paris: The CAC 40 index plummeted 72.30 points, or 4.3%, to 1,611.04, lowest since Feb., 1991.
Frankfurt: The DAX 30 index slumped 53.64 points, or 3.6%, to 1,424.40.
Zurich: The SPI index tumbled 40.60 points, or 3.6%, to 1,098.00.
Milan: The MIB General index sank 16 points, or 2.2%, to 706.
Stockholm: The I-Topp blue chip index collapsed 42.86 points, or 6.1%, to 659.05.
Source: Knight-Ridder Tradecenter
Wall street’s Wild Day
The stock market plummeted early in the day, keying off an overnight plunge in European markets and growing pessimism about the U.S. economy. But buyers reappeared in the afternoon, lifting the Dow from a loss of 105 points to a mere 21.61-point decline by the close.
