Another morning, another choppy red sea on the screen. Aussie stocks are selling off.
The European markets eked out a meagre gain overnight, but investors gave it back in a volatile US session. Small-caps and tech stocks led the decline.
As the US dollar has gone from strength to strength, the Aussie dollar has gone from weak to weaker…and so too has gone the local share market.
If you owned stocks in September, you’re almost definitely nursing some wounds.
But hold on. We’re headlong into a new month. And there’s light at the end of the tunnel…
Free Reports:
Last week you entered the craziest month of the investing year.
Three quarters of the year are done and dusted. Now you’ve hit the time when big-hitting fund managers chop and change their portfolios.
Pro investors’ bosses judge them on monthly and quarterly performance…so for these guys, the September selloff is ancient history.
The big players are already scouting ahead. Beat the market into Christmas, and lock in a nice bonus.
By the way, I could go on for pages about fat-cat fund managers’ addiction to bonuses, and how it feeds financial myopia…but that’s a topic for another day.
Today you want to know if stocks will continue their September slide.
Well, I’m certain that this selloff will end soon.
But it won’t be smooth sailing when it does…
You see, many analysts view October as an investor’s worst nightmare.
History certainly supports the view that we’re entering crash season. Open your history books and you’ll find plenty of horrifying October drops.
I’m talking about the 1929 crash that sparked the Great Depression…the infamous Black Monday crash in 1987…and more recently, the several-hundred-point drop in 2008 as the banking crisis took hold.
Yes, October can be volatile. But that doesn’t mean you have to be terrified of it.
In fact, when you look to the recent past, October has been pretty good to investors.
Over the past five years, the average gain for Australia’s benchmark S&P/ASX 200 [ASX:AJO] in the month of October has been a very respectable 2.75%.
So much for ‘Red October’.
That’s not a bad monthly return for investing in large, lumbering blue-chip stocks. Particularly during a time of unprecedented confusion about how the global economy would grow.
Yes, the stock market has gotten a little choppy…relative to a long recent period of calmer waters.
But if the trend of the past half-decade continues, profits will be on the table for brave October investors.
And you can definitely squeeze a few bucks out of this market into Christmas…particularly if you keep your head while panicky punters are losing theirs.
I can hear you saying, ‘This time is different to the last five years! The stock market is cooked!’
Well, that’s not how I see it.
The biggest factor driving down the Aussie stock market in September was the resurgent US dollar.
That’s clear from the chart below.
It shows the local market’s performance in 2014 (blue), overlaid with the appreciation of the greenback against the Aussie dollar (purple).
Earlier in the year, there was no great correlation between the two. But look to the period I’ve circled — from early September until today — and you can see Aussie stocks and AUD/USD marching almost in lockstep.
That should show you how much America’s currency movements overwhelm other economic trends.
The US dollar has strengthened because more investors are betting that the US Federal Reserve will raise interest rates next year…and that the Fed will keep raising them after that.
If you’re after a bet…taking the other side of that trade could make sense.
And since the US dollar weakened overnight, it looks like investors could be coming back to that stance.
At this point, low interest rates are no longer extraordinary. They’re almost the new normal.
Yes, the market is in uncharted territory. The world’s central banks have pulled experimental levers to keep interest rates low and encourage investment.
But the markets have had five years of this experimental attitude now.
Where’s the hyperinflation and cataclysmic market crash the bears have warned this experiment would cause?
It hasn’t happened.
Central bankers would look at how asset prices have grown over the past few years and declare their experiment a success. Not that I agree with their policies, but that’s just how they would feel about it.
So why would they want to wind it back? Especially while inflation remains low in the US and Europe?
No, low rates are here to stay.
Pundits have been trying to make names for themselves for years now by predicting when rates will rise and when markets will crash.
I have no doubt that both of those things will happen eventually, as sure as night follows day.
But these pundits are jumping the gun. And when they realise interest rates will stay lower for longer, they’ll come back to the stock market in search of dividends and capital gains.
That will be good news for share prices.
Stock should remain volatile in the short term. That’s only natural when shrill voices start to clamour for higher interest rates.
But this will pass…and with plenty of steam knocked out of share valuations over the past month, the pullback presents a buying opportunity for plucky investors.
I mentioned that small caps and tech stocks led the overnight decline on the US markets. But when stocks come out of a selloff, these sectors can give you the most bang for your investing buck.
Don’t get too caught up in the day-to-day chop and fears of volatility.
The big themes that have pushed up the price of shares these past few years will not break down overnight.
And if the Aussie market continues to consolidate around these levels, you could be in for a major fourth-quarter rally if and when shares finally break out.
Cheers,
Tim Dohrmann+
Editor, Money Morning
The post Why September’s Stock Selloff Makes Now the Time to Buy appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
