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October lives up to its reputation
Financial markets

Global sell-off: Sharemarkets across the globe are down 2-3%, responding to a raft of worries

Sharemarket movements can impact consumer sentiment and wealth and therefore affect spending.

What has happened and what does it mean?

• October has a bad reputation with sharemarket investors. There was the October 1987 sharemarket crash when 42 per cent was wiped off the Australian market in the space of a month. Then October 1997 and October 2008, both with double-digit declines. Last year, shares fell 6.5 per cent in October. And this year October hasn’t started well for sharemarket investors.

• As for this month – October 2019 – there are a litany of worries weighing on investor minds. There is the US-China trade war. A new US-Europe trade war is possible. Brexit hasn’t been resolved in the UK. The global economy continues to soften and central banks haven’t been left with much ammunition to address the slowdown. And then there is the Impeachment Inquiry against President Trump.

• So in response, investors are taking money off the table. European markets fell by around 3 per cent on Wednesday. US markets fell by around 2 per cent. Today Asian markets are down around 2 per cent, including similar falls on the Australian market.

• But the falls need to be put in context, it is important to remember that on Tuesday the Australian sharemarket was around 1 per cent below record levels. Similarly in the US, with the S&P 500 index flirting with new highs over the past week. The market has come a long way without a correction. And the shift in the news balance from positive to negative is prompting investors to book profits.

• And while major sell-offs have happened in the month of October, the month has a bad rap. In essence the month should be better known for volatility rather than negativity. Over the past decade, the All Ordinaries has only fallen three times during the month of October. In fact, on average, shares have lifted 1.8 per cent in the month. Going back further over the past 20 Octobers, shares have risen on average by 1.1 per cent. And while the sharemarket has recorded big declines in October, there have been lofty gains like 1974 (+17.2 per cent) and October 1986 (+10.5 per cent)

What are the implications for investors?

• On Tuesday the Australian sharemarket was up 20 per cent for 2019 (January-September) and was on track for the best year in a decade. Similarly in the US the broader S&P 500 index was up over 17 per cent. NZ sharemarkets were actually up 25 per cent for the year, while the German market was up 16 per cent.

• All it would take were some positive comments by the US President on trade to prompt sharemarkets to rally again. Or a strong lift in US employment when the figures are released on Friday. In other words, the news flow could shift again to the more positive end of the scale. But after the US decided to slap higher tariffs on European goods, it is certainly getting harder to get more balance in the news flow.

• Still, if the global economy continues to soften and sharemarket weakens further, central banks will respond by cutting rates. Importantly the US Federal Reserve has substantial scope to trim rates with the federal funds rate now in a 1.75-2.00 per cent range.

• In Australia, our Reserve Bank can trim rates a little further. But there is also more scope for fiscal stimulus given that the budget is balanced. Australia also can claim a record trade surplus, low inflation, relatively low jobless rate, an export-friendly Aussie dollar, substantial infrastructure spending and a recovering property market.

Published by Craig James, Chief Economist, CommSec