There has always been a sense of mystery around predicting stock market rises and crashes.
In the US, some investors even turn to astrology to predict what might happen. While we’re not that easily persuaded here in Britain, people do like the folklore that surrounds the FTSE 100.
Investors frequently talk about Black Monday (October 19, 1987) when stock markets around the world crashed, losing a huge amount of money in a very short time. Before that there was The Wall Street Crash of 1929, also known as Black Tuesday (October 29), which was the most devastating stock market crash in America’s history.
There was a stock market crash in both 1987 and 2007 and some investors believe that years that end in seven are more likely to see a seismic event. There is also a lot of mystery about the month of October, which is often the month when stocks come tumbling down.
Over the past few weeks, Blackfriar has seen an increasing number of fund managers and stock market advisers predicting a crash this October. They have been ridiculed, but at a time when legendary investor Warren Buffet is holding 40 per cent of his investments in cash, you do start to wonder.
October is supposed to be the month that David Davis and his team start thrashing out a new deal with the EU, but many believe the EU won’t be prepared to do this until we have made progress on EU and British citizens living abroad, the Northern Ireland border and the thorny issue of the divorce payment.
Brexiters and Remainers both need to accept that thrashing out a deal with the EU is going to take much longer than two years and much longer than four years, assuming that Philip Hammond succeeds in extending the deadline.
In the meantime confusion reigns and firms are becoming nervous about the prospects for the UK economy.
According to a new survey by the Recruitment & Employment Confederation (REC), employers’ confidence in the UK economy has moved into negative territory, prompting warnings over the impact of Brexit.
The REC found that 31 per cent of employers expect the economy to deteriorate, compared with 28 per cent which expect it to improve. The net balance has dropped to -3 per cent from +6 per cent in the REC’s previous JobsOutlook survey last month.
REC chief executive Kevin Green said the drop “should raise a red flag” as he urged the Government to give greater clarity over Brexit.
The FTSE 100 has boomed because of the fall in the pound since Brexit. Many constituents make their money abroad so the weak pound has boosted their coffers.
However, has the market overheated?
Nathan Parmelee, portfolio manager at Motley Fool Pro, said: “Major valuation signals are flashing red and markets are racing to record-high valuations. And just like during the dotcom bubble, the wise investors ringing the alarm are being publicly ridiculed.
“With the FTSE 100 sitting just below the 7,400 mark, it’s more than fair to wonder how much longer this euphoric bull market can last and even whether we may already be sitting on the edge of a cliff we cannot yet see.”
David Scott, investment manager at Andrews Gwynne, said that research conducted by Nobel Prize-winning economist Robert Shiller on investor behaviour in the 1987 stock market crash found that there was “a great deal of investor talk and anxiety around October”.
“Today’s valuations have been surpassed only during the build-up to the dotcom bubble and 1929 Wall Street crash,” said Mr Scott. “Lofty valuations are a common theme before previous market crashes.”
Mr Scott believes that stock markets will at some point correct in the face of rising credit losses and tightening credit conditions.
“No one knows exactly when it’ll happen, but the time to prepare is now,” he said.
These are worrying times and shareholders should take a very careful look at their investments. October is only round the corner.