Has October given investors a fresh chance to ‘buy on the dip’?

Russ Mould
2 November 2018

“Investors who followed the old saying ‘Sell in May, go away and come back again on St. Leger day,’ walked straight into October’s 5.1% fall in the FTSE 100. That was the index’s worst performance since May 2006 and enough to (just) rank it in the bottom decile of monthly capital returns since 2000,” says Russ Mould, AJ Bell investment director.

“This now begs the question of whether this sharp decline is a chance to ‘buy on the dip’ and follow a strategy that has worked so well since this bull market began in March 2009.

“Analysis of previous monthly falls of equivalent size show that the index bounced in the next month on eight occasions and sagged just twice – and the two drops came as the 2000-2003 bear market began to hit top gear.

“Longer term returns are patchy, with gains for dip-buyers relatively modest, but six of these ten samples came during the 2000-03 and 2007-09 bear markets. 

Ten largest monthly falls of broadly the equivalent size to October 2018 in the FTSE 100 index since 2000:

 

FTSE 100 performance

Month

Fall

Next month

Next three months

Next six months

Next 12 months

Nov-07

(4.3%)

0.4%

(8.5%)

(5.9%)

(33.3%)

Nov-00

(4.6%)

1.3%

(3.7%)

(5.6%)

(15.3%)

Mar-01

(4.8%)

5.9%

0.2%

(13.0%)

(6.4%)

Sep-11

(4.9%)

8.1%

8.7%

12.5%

12.0%

May-06

(5.0%)

1.9%

3.2%

5.7%

10.2%

Oct-18

(5.1%)

 

 

 

 

Jun-10

(5.2%)

6.9%

12.8%

20.0%

20.9%

Dec-02

(5.5%)

(9.5%)

(8.3%)

2.3%

13.6%

Jun-13

(5.6%)

6.5%

4.0%

8.6%

8.5%

Sep-00

(5.7%)

2.3%

(1.1%)

(10.5%)

(22.1%)

Feb-01

(6.0%)

(4.8%)

(2.1%)

(9.7%)

(13.8%)

 

 

 

 

 

 

Average

 

1.9%

0.5%

0.4%

(2.6%)

Not in bear markets*

 

5.9%

7.2%

11.7%

12.9%

Source: Refinitiv data. *This covers the periods following the monthly drops seen in May 2006, November 2007, June 2010 and June 2013 only.

“Anyone who thinks this is not a major downturn will therefore be inclined to pile in and take their chances, albeit in the knowledge that bear markets (just like recessions) only tend to become obvious with the benefit of hindsight and that history is not guaranteed to repeat itself.

“Those of a more nervous disposition may prefer to sit on the sidelines, gather more evidence and assess exactly how much risk they wish to take at this stage of the economic and stock market cycle, nearly 10 years into an upturn on both counts. 

“As Mark Twain’s character Pudd’nhead Wilson remarked: ‘October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.’”
 

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