Can stocks recover in October after Kwasi Kwarteng's mini-budget shocker?

After a terrible September for stock market investors, we look at what caused the rout and how October might unfold.

Well, history tells us September is the worst month for stocks, and investors will certainly hope that is the case in 2022. Most major global stock markets had already suffered significant losses this year, and they extended the bad run during what was a truly awful month.

Politicians tend not to do too much harm during the summer season, as they jet off for a well-earned break. But with a Conservative Party leadership battle won, Prime Minister Liz Truss and her chancellor Kwasi Kwarteng unleashed an emergency mini-budget on the UK economy that caused chaos on global financial markets.

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However well-intentioned Kwarteng’s plan was, accusations of fiscal indiscipline caused a plunge in the British pound to a record low against the dollar. It also does nothing to solve sky-high inflation, and UK interest rates are tipped to keep rising, perhaps as high as 6% next year. Lenders quickly pulled mortgage products and the Bank of England stepped in to prop up the UK pensions sector, promising to spend £65 billion buying UK government bonds. That’s an incredible reversal of strategy given it was just days away from selling down its £800 billion holding of gilts, acquired after the global financial crisis and during the Covid-19 pandemic.

Share prices were down broadly, but housebuilders like Barratt Developments (LSE:BDEV) and Persimmon (LSE:PSN) and banks such as Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) were among the biggest casualties amid fears about the effect of rising rates on the housing market. Despite this, a fall of over 5% for the FTSE 100 in September meant it was one of the best-performing indices. The FTSE 250 mid-cap index was hit much harder by a broad sell-off and company specific issues, dropping almost 10% last month. Royal Mail plunged 33% after the company’s main union threatened strikes in the run up to Christmas, putting online deliveries from the retail sector at risk.

But it’s not just domestic stocks that are struggling. Wall Street has its own problems, with traders fearing the impact of further hikes in interest rates on the US economy and corporate profits. We’ll see how companies have been affected by rising costs and inflation-driven consumer behaviour, when American companies begin publishing third-quarter results over the next few weeks.

In September, the Nasdaq Composite tech index slumped by 10.5%, making it one of the worst performing markets last month. The broader S&P 500 index fell 9.3% and the Dow Jones lost 8.8%. That takes losses for the year so far to 24.5%, 17% and 13.3% respectively.

Will there be respite for stock markets in October?

As with September, history is littered with major events that have caused significant declines in share prices in October. However, it is perhaps the scale of the sell-off rather than the frequency that gives October a bad reputation.

The best-known stock market slump remains the Wall Street Crash which began on 24 October 1929, signalling the start of the Great Depression. A financial meltdown in October 1987 known as Black Monday also kicked off another decline in global financial assets, while the FTSE All-Share Index plunged by 12% in October 2008 during the financial crisis.

Stats by the UK Stock Market Almanac show that between 1990 and 2017, average equity market returns in October were 1.6%, not bad. The market had only fallen six times, and only twice by a significant amount.

And after a run of three negative years – 2018 to 2020 – the All-Share index turned positive again in October 2021 with a gain of 1.7%.

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But October remains one of the most volatile months for stock markets. And 2022 is likely to be no different. Investors will have eyes on global central banks, particularly the US Federal Reserve and Bank of England, even though neither has a meeting scheduled until November.

Both have a balancing act to perform as inflation remains stubbornly high and rising interest rates threaten a recession. The Bank of England has been busy since the emergency budget but isn’t currently expected to raise interest rates before its announcement on 3 November. However, big rate rises are forecast for November and December. 

The Fed doesn’t meet again until 1-2 November, but traders will closely monitor comments from US policymakers in the weeks ahead. Upcoming third-quarter results season will also trigger a response from investors.