October can be a scary time, with horror movies running non-stop throughout the month and children and adults dressing up in spooky and macabre costumes for Halloween. 
Kristina Hooper, chief global market strategist at Invesco, noted that October can also be seen as a scary period for investors – although the basis of these fears might not be grounded in reality.
“October is viewed as a scary month for the stock market. After all, some of the biggest stock market crashes have occurred in October, such as the panic of 1907, the 1929 crash and the 1987 crash. We even witnessed a significant stock market sell-off last October,” she said.
“However, if we were to look at the overall statistics, we would see that October has not historically been the worst month for stock market performance. In fact, there is even a name for this behavioural finance phenomenon – ‘the October effect’.”
Performance of global equities in Oct 2018
Source: FE Analytics
The October effect is the perception (not reality) stocks tend to decline during the month and is therefore more of a psychological expectation than an actual market phenomenon.
That said, Hooper has found that most clients she has spoken with recently have a “high level of trepidation about this particular October”. With this in mind, she takes a closer look at some of the bigger issues facing markets to see if there is anything we should be scared about.
Weak growth in China
China’s GDP grew at an annualised pace of 6 per cent in the third quarter of 2019, down from 6.2 per cent in the second quarter and the weakest in more than 20 years.
Hooper noted that this could be “very worrying” for markets because a slowdown in China frequently leads to slowdown in Europe and may have an impact on the global economy.
“However, even if this data causes jitters among investors, I believe the fear will be very short-lived. After all, 6 per cent GDP growth is still nothing to sneeze at — and it meets the low end of the target range set by China for 2019,” she added.
“It is worth noting that some GDP growth forecasts have been downwardly revised to 5.9 per cent annualised in the fourth quarter. But I believe China will work hard to hit the 6 per cent target.”
This is reflected in moves by Chinese premier Li Keqiang, who is technically responsible for the economy and has been encouraging local government officials to provide stimulus for their respective economies.
Li told local governments they must “enhance the sense of urgency and responsibility” to ensure stable economic growth and “must put growth in a more prominent position” on their work agenda, according to a statement on the government’s website in mid-October.
The US-China trade war
The trade tensions between the US and China have clouded market sentiment for some time but the relationship between the two appeared to improve as they entered into negotiations.
However, Hooper said there now seems to be “a chasm” between what the US believes and what China believes about phase one of the trade negotiations.
“To me, this suggests a greater likelihood of a breakdown in negotiations. We also know the power that newsflow around US-China trade talks has had on stock market performance,” she explained.
“However, I am hopeful that investors will not have outsized reactions to any news on US-China trade talks, as I believe that there will likely be ups and downs, but no resolution in the near term.”
Weak US economic data
While China, the world’s second largest economy, has put out sooner disappointing economic numbers, things aren’t exactly rosy with the biggest economy.
Official data from the US showed that retail sales fell 0.3 per cent in September from the previous month (forecasts had suggested they would rise by 0.3 per cent). In addition, industrial production was weak in September, falling 0.4 per cent.
“While a few data points are not conclusive, we will want to follow upcoming US data releases closely,” Hooper said.
Although US employment has remained strong, she added that many consumers look vulnerable to an economic downturn because they lack adequate savings. A recent survey found that 60 per cent of Americans would be unable to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, out of their savings.
“However, I believe economic data will remain relatively strong in the short term and I believe any negative economic data might be treated positively, given that it increases the likelihood that the Fed becomes more accommodative,” the Invesco strategist said.
The Fed’s October meeting
The Federal Reserve (Fed) will hold its next monetary policy meeting on 29 and 30 October. Hooper noted that the Fed’s meeting in October 2018 contributed to a market well-off, when chair Jay Powell made some hawkish comments.
“And so it stands to reason that an unpopular rate decision – or simply hawkish words from the Fed chair – could be enough to cause another sell-off this month,” she said.
“However, I believe that is unlikely because I expect the Fed to be extremely careful in its wording at the press conference in order to avoid such a fate.”
Geopolitical disruption
There are many examples of political turmoil across the globe that might cause worry for markets, with Brexit, tension in the Middle East, protests in Hong Kong and the impeachment inquiry into US president Donald Trump.
But Hooper argued that markets have largely become “desensitised” to geopolitics and it will have little impact on the stock market – barring any “highly unusual” developments.
“In summary, it’s understandable for investors to be wary this October, but at this point, I believe it’s unlikely that this trepidation will turn into a full-blown sell-off,” the strategist concluded. “This Halloween, I expect the biggest scares to come from haunted houses and horror movies – not from the stock market.”