Can FTSE 100 keep its crown as world No.1 in October?

September lived up to its reputation as the worst month of the year for investing in shares, certainly for most global stock markets. However, for a change, the FTSE 100 and other UK indices found themselves at the top of the performance tables last month.

Concerns about global interest rate policy refuse to go away, which kept overseas investors on the back foot. Rates are now tipped to stay higher for longer to deal with stubbornly high inflation, which means further pressure on both growth companies and the consumer.

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That sentiment was evident when US bond yields surged to their highest in 16 years. Higher bond yields are bad news for stock markets as the pair have an inverse relationship – one goes up, the other goes down and vice versa. Currently, investors chasing the best returns sell stocks in favour of higher-yield bonds.

Threat of a US government shutdown also caused jitters. While a temporary resolution has just been reached, there was, and still is, the risk that a shutdown does happen, potentially affecting essential services and US GDP growth.

All this has hurt tech firms on the Nasdaq such as Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), NVIDIA (NASDAQ:NVDA), Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) - each down sharply in September. The Nasdaq Composite was last month’s biggest faller, down 5.8%, with the broader S&P 500 losing 4.9% and the Dow Jones 3.5%. Elsewhere, the German Dax fell 3.5%, Hong Kong 3.1%, France 2.5% and the Japanese Nikkei 2.3%.

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But the FTSE 100’s lack of exposure to tech or growth sectors worked in its favour this time. The blue-chip index added 2.3% last month, and both the FTSE 350 and FTSE All-Share rose 1.7%. Even the out-of-favour FTSE Small-Cap index eked out a gain of 0.2%.

Much of the UK’s success was down to our biggest stocks in the commodities and banking industries. Glencore (LSE:GLEN) led a charge of the miners, adding 11.5%, while peers Anglo American (LSE:AAL) and Rio Tinto Registered Shares (LSE:RIO) rose 7.9% and 6.2% respectively.

Oil majors did well, too. BP (LSE:BP.) jumped 9% and Shell (LSE:SHEL) 8%, driven higher by stronger oil prices which increased by around 8% in September to prices not seen in over a year. Among the banks, HSBC Holdings (LSE:HSBA) rallied 10.6%, Barclays (LSE:BARC) 7.9%, Standard Chartered (LSE:STAN) 6.5% and Lloyds Banking Group (LSE:LLOY) 4.8%.

Economic data worked in our favour too last month. According to the Office for National Statistics, the UK economy is now 1.8% larger than it was in the final quarter of 2019, just before the pandemic. That’s much better than the previous estimate of 0.2% contraction and also puts the UK ahead of France and Germany, up 1.7% and 0.2% respectively.

If that’s the case, many investors are now asking why the UK stock market continues to trade on lower valuation multiples, which is attracting a steady stream of takeovers from overseas.

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We don’t normally mention the horses in this column, but the St Leger at Doncaster mid-September has a relevance for one particular investing strategy. An old City adage - "Sell in May and go away. Come back on St Leger day” - encourages investors to stay out of the stock market between the end of April and the St Leger, which this year fell on Saturday 16 September. You can read an explanation of it’s importance (or otherwise) in last month’s report here.

For the record, in 2023, the FTSE 100 fell 2% between the close of play on 28 April and 15 September, the day before Aidan O’Brien’s Continuous gave the trainer his seventh St Leger win. The FTSE All-Share index lost 2.2%, the FTSE 250 3.3% and the AIM All-Share 11.2%. This year, the strategy would definitely have worked in your favour.

Buckle up for bumpy ride in October

It’s the time of year that thoughts often turn to anniversaries of past stock market crashes, many of which occurred in October - the Wall Street Crash in 1929, Black Monday in 1987 and the financial crisis in 2008.

But while investors are right to be wary given the scale and significance of previous declines, it is the volatility rather than the likelihood of losses that is the story here.

According to stats compiled by the UK Stock Market Almanac for the years 1990 to 2017, the FTSE All-Share index had only fallen six times, and only twice by a significant amount. Average equity market returns were 1.6%. Since 2017, the index fell three years on the run (down 5.1%, 2.2% and 4.9%) before a return to winning ways in 2021 and 2022 – up 1.7% and 3% respectively.

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As with most months over the past couple of years, all eyes will be on any economic data that gives a clue as to which way interest rate policy might swing. Inflation is falling, but not as quickly as hoped, and the cost of living remains way above the 2% target set by most of the larger central banks. Getting rising costs under control is the main priority right now.

The Federal Reserve doesn’t meet again until the end of October and will announce its policy decision on Wednesday 1 November, so this week’s non-farm payrolls and upcoming inflation reports will be the major influences on market sentiment. Bank of England rate setters will announce their decision a day later.

Current consensus is that global rates have either peaked or are perhaps just one more tweak away from the top of this rate tightening cycle. Anything that suggests otherwise or raises the likelihood of a recession could be problematic.