October Blues

Oct 26, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

There is no denying it was a rough week in the markets.  In fact, it has been a difficult month.  Since the early 20th century, the month of October has been associated with a lower stock market, prolonged bear markets, and economic recessions.  This October is no different.  The Dow Jones Industrial Average (DJIA) is down 6.5% for the month, while the S&P 500 and Nasdaq are down 8.6% and 10.0% respectively.  For the year, all but the tech heavy Nasdaq are now negative.  The month isn’t over yet, but we’re looking forward to moving into November.  I’m sure you are too.

So why is October such a bad month?  A lot of research has been done on this subject and you might be surprised to learn that it is only the fourth worst month of the year in terms of returns.  However, history is a major factor in people’s perception of the month.  It was in October 1929 that the stock market crashed, ushering in the Great Depression.  Another factor is momentum.  September is the worst month of the year for stock market returns, and selling momentum often follows into October.  Perhaps most intriguing is newer research that suggests the changing of the seasons may play a role.  Researchers speculate that emotions can turn negative when the calendar year changes from summer to fall.  With summer vacations over and the sun setting earlier, investors’ moods may lean toward the gloomy.  As a result, negative economic or market developments can cause overreactions.  The good news is that the months of November and December often experience a turnaround called the “Santa Claus rally” due to a flipping of moods during the holidays.  There is also the “January Effect” which occurs when investors sell stocks before the end of the year only to buy them back in January for tax purposes.  In a nutshell, there is reason to believe things will get better.

Let’s move on.  The mid-term elections are only eleven days away and it is an understatement to say that a lot rests on the outcome.  Not missing a beat, President Trump has proposed a sweeping middle-class tax cut that is long on hope and short on details.  It is expected the proposal will be released just prior to the midterm election, although the House is out of session from October 15-31 and could not vote on it until November at the earliest.  In another controversial move, the President announced he is mulling the idea of tying U.S. drug prices to Europe’s.  Specifically, he’s exploring benchmarking Medicare reimbursement to the average price in Europe for drugs administered by doctors.  European countries currently pay about half the U.S. rates.  I fully expect the U.S. pharmaceutical industry to push back hard on this plan.

This next story impacts us all and is one I’m sure you’ll feel sympathy towards.  The Wall Street Journal wrote a piece this week highlighting the plights of banks.  It seems customers have pulled billions from accounts at these institutions that don’t pay interest.  While the Federal Reserve has raised interest rates for almost three years, banks have been notoriously slow to raise interest rates on deposits.  Over the past year ended June 30, customers withdrew more than $30 billion from non-interest-bearing U.S. bank accounts.  You can’t blame them, can you?  Who doesn’t want free money to make loans in an environment where interest rates are rising?  Eventually, the free market will force banks to increase interest rates on deposits as online alternatives gain traction.

In closing, I want to turn to a subject that isn’t as amusing as I’d like.  To a large extent, the financial crisis in 2008 was predicated on easy money.  Yes, the banks created terrible and in some cases fraudulent products.  But it was the easy money that allowed borrowers to buy homes well beyond their means.  It was also the collapse of the housing market that led to the ensuing collapse of several large financial institutions necessitating the $800 billion bailout.  This week FICO, the primary company that provides credit scoring services, announced it is overhauling its credit scoring methodology.  It plans to unveil a new system next year called the UltraFICO Score, which is designed to give people with blemished credit histories a more favorable rating.  It is expected this overhaul will increase approvals for credit cards and personal loans.  Call me crazy, but this loosening of the standards is what got us into trouble in the first place.  There is an adage that goes, “Those who do not learn history are doomed to repeat it.”  Despite only ten years having passed, it seems we’ve forgotten.  Now you know.

October 26, 2018

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