As an investor for 35 years, I’ve witnessed four major stock market crashes. My first was Black Monday (19 October 1987), when stocks plunged after rising relentlessly since 1984. The second was the dotcom bust of 2000-03, then the global financial crisis (GFC) of 2007-09. My fourth was the meltdown in March 2020. Though the S&P 500 index is up 25.8% and the FTSE 100 index is up 18.2% over the past year, I still worry about the next stock market crash. Here are three triggers that might burst our bubble and send stock prices crashing in October.
1. Stock market crash: the ‘October curse’
It’s been said that history doesn’t repeat itself, but often rhymes. Historically, October has been perhaps the worst month for market meltdowns. For example, the Wall Street Crash of 1929 happened in October, triggering the Great Depression of the 1930s. The 1987 stock market crash happened in October and October 2008 was one of the worst months for stocks during the GFC. October has acquired a fearsome reputation as one of Mr Market’s worst months. Indeed, in Pudd’nhead Wilson, American author Mark Twain wrote: “October. This is one of the peculiarly dangerous months to speculate in stocks.” But to be fair, he added: “The others are July, January, September, April, November, May, March, June, December, August, and February.”
2. China Evergrande
Evergrande Real Estate Group (SEHK: 3333) is China’s second-largest property developer (and a global giant). But its bonds and shares have plunged this year, on fears the massively indebted real-estate group might default on its debts. The over-stretched company has over $305bn of outstanding debt and other liabilities. Last month, Evergrande missed a scheduled interest payment to overseas bondholders. Thus, credit-rating agencies may place Evergrande in default this month. Global investors are genuinely worried this might trigger a ‘Lehman moment’. That’s so-called because the US stock market crashed after US investment bank Lehman Brothers declared bankruptcy in mid-September 2018.
Evergrande needs to rapidly sell enough assets to raise cash and avoid debt default. If not, its woes might spread to the wider Chinese property market. But selling assets in a fire sale might not raise enough cash to keep the group alive. And if the Chinese Communist Party decides to let this property behemoth sink, it could set off stock market crashes in China and Hong Kong. If this contagion were to spread to US and UK stocks, we might all be in for a rough ride.
3. Monetary policy, inflation and interest rates
My third possible spark for an October stock market crash combines three things. They include monetary policy, consumer price inflation and interest rates. In our highly indebted world, higher interest rates might be the pin that bursts our bubbles. Recently, a few central banks have lifted interest rates in order to curb rapidly rising inflation. My big worry is if/when the Federal Reserve decides the US economy is overheating. If inflation stays high and the US labour market keeps strengthening, Fed chair Jerome Powell may start tightening US monetary policy. This could start with lower asset purchases, then move to higher interest rates. In this scenario, I would really worry about the fate of America’s most highly indebted businesses in any stock market crash.
Finally, I’ve learnt not to fear stock market crashes. I simply buy quality shares at bargain prices and then await the next bull (rising) market!
