Business News

October is not always a scary month

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by Peter Switzer

October is often thought to be the scariest month of all when stock markets crash such as in 1987 and 2008. However, the month of October has actually been the seventh best month for the Dow. Away from the market, the more worrying aspect of this October could be an expected interest rate rise from the Reserve Bank that could be topped up by the banks. More on this later.

CNBC says stocks have gone up 57 per cent of the time since the index was founded 113 years ago.

So, it doesn’t have to be bad but there’s around a one in two chance of a troublesome month.

Weekend catch-up

The fear factor didn’t hurt our market yesterday with good economic news out of the US and Chinese economies pushing up the S&P/ASX200 Index by 46.1 points, or one per cent, to 4625.3. That was a nice start to this ‘tricky’ month but this was helped by Wall Street which went just positive on Saturday morning our time.

The Dow put on 41 points or 0.39 per cent and the S&P 500 added five points, or 0.4 per cent, to close at 1146.24.

The Yanks had better than expected auto sales reports from the likes of GM and Ford, which is a good sign.

Then the Institute for Supply Management’s index of manufacturing activity dropped from 56.3 in August to 54.4 per cent in September. This was what the market expected but remember any number over 50 means that manufacturing is growing.

On the good news front, construction spending rose 0.4 per cent but it was driven by public spending. Keeping the good news rolling the Thomson Reuters/University of Michigan index of consumer sentiment beat the tipsters rising to 68.2 in September, which beat the street’s forecasted reading by 1.2.

Also personal spending rose 0.4 per cent in August, which again topped forecasts. And the personal consumption expenditures price index rose only 0.1 per cent for a fourth month.

So the US economy is looking in better shape than was expected and the latetst Chinese manufacturing data also said that the world second biggest economy will be putting in big time to future global growth. That has to be good for the likes of BHP Billiton and Rio.

Wall Street lower overnight

So, if all is so good, why did Wall Street slip this morning quite noticeably this morning?

The simple answer is that after September brought about a nine per cent rise in US stock markets, profit taking cannot be ruled out with reporting season kicking off this week with the big bellwether stock Alcoa out on Thursday. And there’s also another monthly jobs report, which always creates some high anxiety.

The Dow lost 78.41 points or 0.72 per cent to end at 10,751.27. The S&P 500 dropped 9.21 points or 0.8 per cent to 1137.03, which is still above the 1131-level, which chartists say is important.

Part of the fall might be linked to the rise in the greenback, which hit our currency taking it below the 97 US cent-mark and is bound to weaken the likes of BHP and Rio today. One day up, one day down — what’s new?

The US dollar could be gaining friends as the likelihood of a US double dip into recession starts to recede.

To today’s economic news, and pending home sales rose 4.3 per cent in August and that’s the second month in a row of rises for this measure. However factory orders fell by 0.5 per cent.

Rates to rise?

On the local front, the big news will be what the Reserve Bank does today. The consensus of economists says rates will go up by 0.25 per cent and the banks could get in on the act, adding 0.2 per cent on top. For those panicking, here’s how you could be approximately affected:

A 0.45 per cent increase on a $300K mortgage = $90.
A 0.25 per cent increase on a $300K mortgage = $50.
A 0.25 per cent increase on a $100K mortgage = $17.

I think the Big Bank should wait and see the next CPI number out later this month, which some economists say could be lower than expected.

Personally I think the RBA will raise rates, though they shouldn’t because the economy, outside of mining, isn’t all that strong. Unfortunately when Glenn Stevens hints about a rate rise, the chorus line of economists kick up their heels and start chanting that a rate rise is coming. It then becomes a foregone conclusion, regrettably.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, October 05, 2010