The October Effect or buy the dip?

October 26, 2018

There is a phenomenon that shares fall in the month of October. This month is certainly no different. One may question whether this is a trend or coincidence?

History often has a funny way of repeating itself, with October experiencing market crashes during the Great Depression (1929), Black Monday (1987) and the GFC facing heavy falls in October 2008, to name a few.

If I focus on the US market (S&P500) since 1987, the average monthly decline is -0.5%. Not exactly a compelling argument for a trending market crash. Negative nonetheless, hence warrants a theme.

Source: IRESS, Pitcher Partners

Yet there are always two sides to a debate. If I look at the succeeding months from October to the beginning of January, the recovery averages a 5% bounce.

Source: IRESS, Pitcher Partners

Understanding this isolates periods in time, my point is, those who cave in to the October Effect, or let emotions override longer term decisions, often move to cash, missing out on the recovery. If you have the confidence to buy the dip, history tells us you will be ahead of the market. Easier said than done? Of course. Yet it highlights that removing short term trends and focusing on the bigger picture, is more rewarding over the long term.

Turning the attention to Australia, our last reporting season saw over $28 billion in dividends paid to shareholders, with almost 93% of company profits in the black at the time. Importantly, 60% of those companies, experienced a rise on pervious figures:

Source: CommSec, ASB Securities, IRESS

This cash injection will no doubt be reduced by taxes and consumer spending. However, superannuation providers and Self Managed Super Funds are allocated a material amount of this $28B. This money will eventually find a new home, along with additional contributions. Acknowledging various asset classes may become new beneficiaries, we often find the cash being reinvested in the ASX, once confidence returns - adding to my October to January market rise debate.

I am certainly not guaranteeing a bull market over the next few months. Volatility is up, above long term averages. Everyone views risk differently. The prudent identify buying opportunities within their pre-determined parameters, and enjoy their weekends.

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