Economics

Shocktober: Seven charts that tell the story of the worst month for stocks in six years

Here are our charts of the month for October, when stock markets sold off sharply.

5 November 2018

David Brett

David Brett

Investment Writer

The MSCI World fell 7.4% in October as investors fretted about issues such as US-China trade tensions, European political uncertainty and the end of quantitative easing.

The sell-off made it the worst monthly performance for stocks globally in the last six years and it’s the tenth worst in the last decade. To put that into perspective, the nine worst months all came during or as a result of the global financial crisis.

MSCI World 10 worst monthly performances of the last decade

RankDateMSCI World total return monthly change
1 31 October 2008 -19.0%
2 30 September 2008 -12.1%
3 27 February 2009 -10.5%
4 31 May 2010 -9.9%
5 31 May 2012 -9.0%
6 30 September 2011 -8.8%
7 30 January 2009 -8.8%
8 30 June 2008 -8.1%
9 31 January 2008 -7.7%
10 31 October 2018 -7.4%

Please remember that past performance is not a guide to future performance and may not be repeated.

Source: Schroders, Thomson Reuters Datastream data for the MSCI World price index in dollar terms correct as at 1 November 2018.

Historically, October has been a good month for stock market investors but when there is a bad month, it tends to be really bad:

  • Since 1992 the market has only fallen in five Octobers
  • But since 1984, seven of the ten largest ever one-day falls have occurred in October (largest on 20 October 1987)
  • Since 2000 the average return for October has been 1.8%, making it second best month for returns after April

Regionally, most markets neared correction territory this October. A correction is when there has been a fall of 10% or more. Emerging markets are nearing a bear market, which is a fall of 20% or more.

Japanese stocks fared the worst this October, falling 9.1%. Emerging market stocks fell 8.8% and European stocks fell 5.3%. US stocks were down 7%, while UK stocks performed the best of the major markets, but were still down 5.1%.

A strong dollar (more of which later) tends to help the UK stock market. Many of the companies listed in the UK earn their revenues abroad, so when the dollar is strong and the pound is weak they make more money when they convert their earnings back into sterling.

However, the sell-off has made stock market valuations more attractive.

Price-to-earnings (P/E) ratios (one of the most widely used valuation measures) of all the major markets have come down significantly this year.

P/E is calculated by dividing a stock market’s value or price by the aggregate earnings per share of all the companies over the next 12 months. A low number represents better value.

Regional MSCI valuations now vs 2018 high

IndexP/E of market as at 24 October 2018*2018 high
MSCI US 20.7 25.7
MSCI Europe ex UK 15.0 20.4
MSCI UK 14.1 20.5
MSCI Japan 12.9 16.3
MSCI Emerging Markets 12.1 16.0

*Source Schroders. Valuation data is released monthly. 24/10/2018 figure has been estimated by taking the end of September figure and rolling it forwards using price changes between those dates. Due to data limitations, no account has been taken of any changes to earnings, book values or dividends between these dates. However, any such changes are likely to be small and immaterial in this context.

The sectors that performed the worst (and best)

So-called growth sectors such as technology suffered, but it was those exposed to the fortunes of the global economy that were hit hardest. Construction, materials and basic resources all fell by high single digit or low double digit percentages.

Outperforming the market, but still falling, were those defensive sectors such as tobacco, utilities and food & drug retail. These sectors tend to perform well in turbulent periods because demand for the products they produce remains consistent whether times are good or bad.

How the sectors performed in October 2018

SectorOctober 2018 returns
Construction & materials -10.7%
Industrials -10.2%
Retail -9.7%
Technology -9.4%
Chemicals -9.2%
Oil & Gas -8.9%
Basic materials -8.5%
Basic resources -7.7%
Auto & parts -7.5%
Travel & leisure -7.5%
Market -7.4%
Health care -7.1%
Financial services -6.8%
Insurance -5.9%
Banks -5.3%
Media -4.4%
Telecom -4.1%
Beverages -4.1%
Food & drug retail -3.0%
Real estate -2.7%
Utilities -1.6%
Tobacco -1.1%

Please remember that past performance is not a guide to future performance and may not be repeated.

Source: Schroders, Thomson Reuters Datastream data for the Thomson Reuters Global Index return, including dividends, priced in dollar terms correct as at 1 November 2018.

FAANGs and other growth stocks suffer

The FAANGs (Facebook, Amazon, Apple, Netflix, Google/Alphabet) fell in October, along with other classic growth stocks such as Alibaba, China’s equivalent of Amazon, or the UK drinks-maker Fevertree.

In bull markets, growth stocks tend to rise at a much faster pace than the overall market, because investors become increasingly comfortable with risk when times are good. Conversely, growth stocks tend to decline at a more rapid rate in bear markets as investors seek to reduce their risk profile.

How some growth stocks suffered in October 2018

 

Please remember that past performance is not a guide to future performance and may not be repeated.

Source: Schroders, Thomson Reuters Datastream. Performance for each stock priced in local currency. Data correct as at 1 November 2018.

To illustrate the point, while valuations have fallen they remain high for some growth stocks.

The table below shows the price-to-earnings (P/E) ratios (one of the most widely used valuation measures) for the FAANGs and Fevertree compared to the MSCI World Index.

P/E is calculated by dividing a stock’s value or price by its earnings per share over the next 12 months. A low number represents better value.

How growth company valuations have changed in 2018

 AppleAmazonFacebookNetflixAlphabetAppleMSCI World
P/E at start of the 2018 18.4 297.70 32.80 194.30 35.10 76.30 21.50
P/E at 1 October 2018 19.70 181.90 22.50 160.20 34.40 64.00 19.30

Source: Schroders, Thomson Reuters Datastream data correct as at 1 November 2018.

The dollar continues to rise

The dollar index is at its highest point in 2018 and rose sharply in October. The dollar is seen as a safe haven for investors.

“Safe haven” currencies are ones investors tend to buy and hold during periods of uncertainty because they are perceived to be less risky and often appreciate in such conditions. Characteristics of a safe haven currency include strong country finances, strong economic growth, a stable political system and they can be easily bought and sold, although no investment is risk free.

The rise of the dollar in 2018

 

Please remember that past performance is not a guide to future performance and may not be repeated.

Source: Schroders, Thomson Reuters Datastream. Data correct as at 1 November 2018.

The mixed performance of commodities

Oil sold off sharply in October, while copper continued its recent weak trend. Both of these commodities tend to perform better when the prospects for the global economy are good.

In contrast, gold remained steady despite the rise of the US dollar. Being priced in dollars, gold tends to suffer when the dollar is strong because it becomes more expensive to buy.

However, in turbulent times gold can be considered attractive due to its tangible qualities and the fact it tends to hold its value.

The mixed performance of commodities in 2018

 

Please remember that past performance is not a guide to future performance and may not be repeated.

Source: Schroders, Thomson Reuters Datastream. Data correct as at 1 November 2018.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. 

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