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Stock Prices Plummet in October

By Shlomo Maital

On Sept. 13, in a blog titled “the coming meltdown”, I noted signs that the world economy was weakening.

Now, in this the middle of October, stocks have declined sharply.   For the month, U.S. stocks are down 5 per cent, German stocks are down 9 per cent and French stocks are down 11 per cent.   There are a number of causes.   Believe it or not, Ebola has created a negative mindset. Oil prices are down, slashing profits for many big companies and nations. Demand appears to be weakening in Europe, raising fears of a third recession since 2009. Geopolitics are highly unstable, with problems in Ukraine, the Mideast and elsewhere.

   At the same time, there is a flight to ‘safety’. Bond prices are up, as demand increases, with investors willing and even eager to take low yields in return for safety.

   The bright spot is the U.S. economy. Falling gasoline prices, often below $3 a gallon, have put money into working people’s pockets and they are spending it. This is a natural experiment. It amazes me how economists and policymakers are ignoring this simple evidence — spurring demand helps the economy! America’s economy is doing better than Europe’s as a result.

   October is an awful month for stock prices, for some reason. In October 1987, the market fell 20 per cent on a single day, but that was due to computer trading and a doom loop link between spot and future prices.

   The mindset of global investors continues to be shaky. In the end, it is the confidence, or lack of it, of global investors that drives equity and bond prices. When world headlines are terrible, as they are now, investors run for cover.