Are we heading for another Black Monday?
October is a dangerous month for the stock market, containing as it does the anniversaries of both the 1929 crash and 1987's 'Black Monday'. And current conditions look remarkably similar to those preceding the latter crash...
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October is a dangerous month for the stock market.
A lot of unpleasant anniversaries fall in October. The 1929 crash that came before the great depression happened in October. The 1987 Black Monday' crash was another.
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As Ambrose Evans-Pritchard points out in this morning's Telegraph, the 1987 crash happened at a time when the dollar looked distinctly weak, global interest rates were rising, and energy prices were heading higher.
Sounds familiar
Just as we saw in 1987, the dollar is vulnerable, oil prices are soaring and global interest rates are heading higher, says Ambrose Evans-Pritchard in the Telegraph today.
But could we really be heading for a repeat of Black Monday? And perhaps more to the point, would it matter? After all, although the Dow Jones dropped 35% over the course of the ensuing falls, it was back to new highs less than two years later.
And stocks seem to be even harder to rattle now. The stock market has taken everything that has been thrown at it over the past few years a dramatic collapse in the US housing market and the frozen-over money markets being just the most recent disasters in its stride. Stocks in the US are riding high again after the most recent correction, with the Dow Jones sitting above 14,000.
But as Francesco Guerrera points out in the weekend FT, there are many reasons to remain fearful. Wall Street analysts reckon that S&P 500 company earnings will fall in the third quarter of this year. "US company profits have not been as anaemic as this in more than five years," yet, says Guerrera, "amazingly, the market is still expecting profit growth to bounce back into double digits in the final three months of the year."
With the US property market still tanking, and other global housing markets looking increasingly vulnerable see below for more on this it's hard to see how the stock market optimism can be maintained as the position of Western consumers grows ever weaker, as investment director Tim Price (you can find out more about Tim and his specialist investment service here: The Price Report) argues. However, it takes more than one point of view to make a market and economist and stockbroker James Ferguson reckons that equities still look good value, even if the US is heading for a recession. You can read both of their arguments in the latest issue of MoneyWeek, out now (If you're not already a subscriber, you can sign up for a three-week free trial by clicking here: Sign up for a three-week free trial of MoneyWeek).
All the same, even James reckons we could see another hefty correction in the markets (were talking double-digit falls), as investors come to terms with the likelihood of a US recession.
Just before I go, after Friday's Money Morning (Leave buying stamps to the experts), in which I pointed out that most good investments generate an income stream, a few of you quite rightly wrote in to point out that gold - a MoneyWeek favourite - doesn't pay out anything. I should have addressed this point on Friday - so I'll do so now.
It probably makes sense to see gold more as an insurance than as an investment as such. It's there to protect your wealth when times are uncertain and confidence is fragile. As our publisher Bill Bonner puts it, people turn to gold when they're worried about the return of their capital, rather than the return on it. Gold doesn't rely on anything to back it up - it's not a government- or corporate-backed IOU, it's not a share in a company, it's not paper in a dangerously under-funded bank - gold stands on its own.
Of course, there's also a very attractive supply and demand situation in gold just now, with mine production falling and demand from Asia rising, but that's just a bonus. See our investing in gold section for the best ways to invest in gold. Eoin Gleeson also took a look at some of the most attractive-looking gold mining stocks in a recent issue: Why miners are the cheapest way to buy gold.
One other thing - if you follow the housing market (and mostdo) then you'll probably want to read Roger Bootle's column in today's Telegraph. Well-known for making some very bearish calls on the housing market a few years ago, Mr Bootle has inevitably had to accept a fair amount of flak from the bulls following the property market's post-2005 revival - we can sympathise with his plight. But now he thinks he might just be able to stop eating humble pie in the very near future. It's well worth a look.
Turning to the wider markets
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In London, a late rally from Northern Rock helped the FTSE 100 pull back from earlier losses - which saw the index sink to as low as 6,660 - to end the day 6 points higher, at 6,730. Mortgage bank Northern Rock rose following a proposal from a consortium led by the Virgin group which would see a 'substantial' injection of equity into the lender. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 fell 18 points on profit-taking to end the day at 5,843. And in Frankfurt, the DAX-30 was up 7 points at 8,041.
On Wall Street, the Dow Jones was up 78 points, at 14,093 as investors were cheered by positive economic data. The Nasdaq added 33 points to end the day at 2,805 as investors piled into tech stocks. And the S&P 500 added 7 points to close at 1,561.
In Asia, the Japanese Nikkei was only moderately higher this morning as weakness in the banking sector offset gains for tech stocks. However, the Hang Seng had added 702 points to reach a record high of 29,540 during today's session thanks to strength amongst oil stocks.
Crude oil had risen to $83.95 this morning and Brent spot was at $81.08 in London.
Spot gold rose above the $750 mark this morning - a new 28-year high - before falling back to $754.00. And silver had risen to $13.94, from $13.76 in New York late on Friday.
Turning to the currency markets, the pound was at 2.0373 against the dollar and 1.4325 against the euro. And the dollar was at 0.7029 against the euro and 117,69 against the Japanese yen.
And in London this morning, shares in leisure stock Rank had fallen a further 12%, extending Friday's heavy losses, after thecompany warned that the smoking ban and new laws to remove high-jackpot gambling machines had hurt sales at its English casinos and bingo halls.
And our recommended articles for today...
Is clean coal the future of energy?- With world energy consumption set to rise significantly - and the holy grail of nuclear fusion yet to be realised - coal is looking like the best solution to our energy needs. It remains controversial from an environmental point of view, but one company could have come up with a solution. For more on the latest developments in the energy industry, click here: Is clean coal the future of energy?
Why gold is set to climb even higher - If gold reaches $780 by the date of the rugby world cup final then it will have doubled since England won the trophy in 2003. And it isn't just the weak dollar that's driving the price to such dizzying heights. Click here for more on why gold price action suggests that investors remain concerned about the state of the global economy: Why gold is set to climb even higher
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