Prieur Perspective: Volatile October Ends with a Bang
A difficult end to a long, long month.
MSCI Word Index: -19.1% (largest monthly decline since the Index started in 1969, beating October 1987's -17.1%)
- MSCI Emerging Markets Index: -27.1% (worst monthly loss since Russia's debt default in August 1998)
- Dow Jones Industrial Index: -14.1% (15th worst monthly decline since 1900 and the biggest drop since October 1987)
- S&P 500 Index: -16.9% (8th worst one-month decline since 1930)
- US Dollar Index: +7.8% (4th best one-month improvement since 1967
- Reuters/Jeffries CRB Index: -22.3% (worst monthly decline since the Index started in 1956)
- Crude-oil futures: -32.6% (worst one-month drop since oil futures started trading on the New York Mercantile Exchange in 1983)
- Reuters/Jeffries CRB Industrials Index: -26.5% (sharpest monthly decline since the series started in 1971)
- Gold futures: -18.5% (biggest monthly loss since 1983)
But the last week of October witnessed a strong rebound in global stock markets, as investors brushed aside discouraging economic reports and took heart from central banks' cutting key lending rates, in addition to positive developments in the credit markets. This resulted in investors scooping up beaten-down stocks around the globe, particularly emerging-market stocks, government bonds and currencies, which mended some of the damage done in October.
Further evidence of just how tough October has been was provided by Thursday and Friday's stock-market improvement, which produced the first back-to-back days of gains for the S&P 500 Index and the Dow Jones Industrial Index since September 25th and 26th.
The FOMC lowered the Fed funds target rate from 1.5% to 1.0% on Wednesday. This action followed an emergency 50 basis point cut in the benchmark rate on October 8th. The committee's statement said economic activity has "slowed markedly" and cited weakness in consumer spending, business investment and exports. It also noted tight credit. The statement furthermore said that "downside risks to growth remain," an indication that more rate cuts could follow. The target rate was last at 1.0% in 2004 and has not been below this level since 1958.
The Fed followed up its rate-cutting action with an announcement that it was setting up dollar swap lines with Brazil, Mexico, South Korea and Singapore, contributing to the sharp turnaround in emerging-market assets.
Where do we go from here? One bit of cheer is that the stock market is now entering what has historically been the strongest half of the year.
Chart of the Day reported that "investing in the S&P 500 Index from the last trading day in October through the end of April accounted for the vast majority of S&P 500's gains since 1950. While there are some noteworthy periods in which the Halloween indicator didn't produce (i.e. 1973-74 and 2000-01), the overall outperformance is compelling."
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