October lows have extreme sentiments linked to them. This makes for a fascinating study of multi-month, multi-year and multi-decade bottoms.
The month of October has a special place in econohistory. But, somewhere on the way the significance has been lost. There are many reasons. First, we as human beings are more interested in highs than lows. Second, a crisis gets more attention when it begins not when it ends or pauses. Third, masses can never attach more significance to a calendar month than they can to news. We like stories not some non-descript month of the year.
Fortunately or unfortunately, October has played a key role in economic cycles from documented history as back as 1869, when United States faced its first major financial and gold crisis. ‘Black Friday’, as it became known, was the result of an attempt by financiers, Jay Gould and James Fisk, to corner the gold market.
In those days, Treasury's surplus gold was sold for greenbacks, which was used to buy back government bonds. Because the gold market was small, the federal government was essentially able to set the price; selling more of the Treasury's gold reduced the price, while selling less raised it.
The Panic of 1907, also known as the 1907 Bankers' Panic, was another financial crisis which followed the Black Friday episode 30 years later. The stock market fell nearly 50 per cent from its peak in 1906, the economy was in recession, and there were numerous runs on banks and trust companies. The contagion spread across the nation and lead to the closing of banks and businesses. The panic was followed by a second crash, which occurred in October 1907.
The stock market crash of 1973–74 was a crash that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year.
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Then came the crash on October 19, 1987, a day also known as Black Monday, which was the culmination of a market decline begun five days before on October 14. The DJIA fell 3.81 per cent on October 14, followed by another 4.60 per cent drop on Friday, October 16. But, this was nothing compared to what lay ahead when markets opened on the subsequent Monday. On Black Monday, the Dow Jones Industrials Average plummeted 508 points, losing 22.6 per cent of its value in one day.
The Russian financial crisis (also called “Ruble crisis”) hit Russia on 17 August 1998. It was exacerbated by the Asian financial crisis, which started in July 1997. Given the ensuing decline in world commodity prices, countries heavily dependent on the export of raw materials, such as oil, were among those most severely hit. The markets bottomed in October 1998. The RTS Moscow’s current collapse of 30 per cent year to date makes it one of the worst performers in global equity indices. And coincidentally we have similar conditions now like we had in 1998 with falling commodity and crude oil prices. We mentioned about the strong connection of commodity boom with Russian and Brazilian markets in ‘Revisiting BRICS’ (January 2008).
October 1998 has a strong connection with equity markets worldwide. The low happened in the Dow, the Bovespa (BVSP), the Nikkei, the Dax, the Sensex and the RTS. And strange as it may seem, the Dow retested this low again in October 2002. The market downturn of 2002 again happened across the globe including India in October. Dow Industrials has a history with October in the year 1869, 1907, 1929, 1958, 1960, 1966, 1974, 1987, 1990, 1998, 2002 and now we are here nearing October 2008. The story repeats when you take Nikkei, but the occurrences shift sometime from October to November. BVSP has a similar pattern in 1994, 1998, 2002, 2007, 2008. Even the Dax repeats the sequence in 1990, 1992 and 1998.
The Chinese crisis labelled as another Black Tuesday occurred in February 2007 when China fell 9 per cent; the worst ever fall in a decade. This made global headlines. But, all this pales in comparison with the 61.8 per cent fall in Shanghai composite since October 2007 leading to October 2008. This near 12 month fall is the real October crisis heading for another October low, retracing gains of seven years.
In all this Octobers that we have mentioned above there was an exception. This was the crisis that happened nearly 30 years after the crisis ridden 1900's. This was the famous October 29, 1929 crash. This crash did not stop at the October low. First it was the Black Thursday (October 24), followed by Black Monday (October 28) and then the Black Tuesday on October 29. On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8 per cent. The Dow Jones Industrial Average lost 89 per cent of its value before finally bottoming out in July 1932. This was the great depression.
October lows have extreme sentiments linked to them. This makes them great multi month, multi year and in some cases multi decade bottoms. After the 1929 October breach, Dow Jones has not breached another October low. The only marginal breaches we saw were in the sideways bear market of the 1970's when October lows were retested on multiple occasions.
Cycle lows are more important then cycle highs. Contagions are more synchronous than tops. The classic reason is the lack of mass interest that lows evoke. This makes them more solid and unflappable. Above this, wealth destruction destroys social mood. It quietens the party goers, sometime for a generation. A famous quote by Richard M Salsman, American economist, goes like this: “Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.”
“The fundamental business of this country is on a sound and prosperous basis,” said President Hoover in October 1929. “The economic fundamentals of this country remain sound,” said Ronald Reagan in October 1987 are clear historical precedence regarding the worthless of news, as Ralph N Elliott pointed out in 1930’s.
October connects us like nothing else. Elliott also mentions about the French economist Pigou in his market letters, published by the New Classic Library. Pigou discussed at length psychological errors and their relation to booms and depression.
He maintained that an error of optimism tends to create, throughout the community, a certain measure of psychological interdependence until it leads to a crisis. Then the error of optimism dies and gives birth to error of pessimism. We are nearing October 2008. If this looks like just another calendar date, think again.
The author is CEO, Orpheus CAPITALS, a global alternative research firm